How The Cares Act May Apply to Your Retirement Plan
The Coronavirus Aid, Relief, and Economic Security Act—or CARES Act—includes provisions that may apply to your retirement plan. The key highlights of this act are that it expands and relaxes rules on both withdrawals and participant loans and it defers mandatory distributions for participants of 401(k) and most other defined contribution plans or IRAs.
Let’s talk first about changes involving coronavirus-related distributions, or CRDs.
A plan participant may take a coronavirus-related distribution of up to $100,000 any time in calendar year 2020 based on one of these two events. One: a participant, participant’s spouse, or participant’s dependent is diagnosed with the virus via a test approved by the CDC, or two: a participant experiences adverse financial consequences as a result of quarantine, furlough, being laid off, having work hours reduced, closing of business, or other factors as determined by the secretary of the treasury.
Note that the administrator of the plan MAY rely on the INDIVIDUAL’S certification that the individual qualifies for a coronavirus-related distribution under these two categories.
Under the CARES Act, penalties are waived on withholding tax and early withdrawals. That means that the mandatory 20% withholding tax and the 10% early withdrawal penalty for those under 59-and-a-half are both waived.
Furthermore, a coronavirus-related distribution MAY be re-contributed or rolled over. That means: the amount of money withdrawn may be returned to the plan OR to a different qualified retirement plan within 3 years after the date the distribution is received WITHOUT regard for any plan limit on contributions. If a plan participant takes a distribution and does NOT re-contribute it to any qualified retirement plan within 3 years, taxation on the distribution may be spread over a 3-year period.
Second, let’s talk about the temporary increase in plan loan limits.
The CARES Act temporarily allows a participant, who meets the SAME requirements as for coronavirus-related distributions, to take an increased loan. This is available for 180 days, beginning March 27th, 2020. A qualified participant — normal qualification rules still apply — may request a loan of up to 100% of the present value of their vested account balance, with a maximum loan of $100,000.
Participants with an outstanding plan loan, with a repayment due from the date of the CARES Act enactment THROUGH December 31st, 2020, can delay their loan repayments for up to 1 year. This is available for ANY loan, whether coronavirus-related or not. Subsequent loan repayments will be adjusted to reflect both the delay in that due date and any interest accruing during the delay. THe 5-year loan repayment period can also be extended for one year, but interest will continue to accrue during the delayed repayment period.
Third and last, let’s talk about how required minimum distributions — or RMDs — are waived for 2020.
RMDs from defined contribution plans for calendar year 2020 need not be made. This waiver applies to defined contribution 401(a) qualified plans, defined contribution 403(a) and 403(b) plans, governmental defined contribution 457(b) plans, and IRAs.
Plan amendments for these revisions are not required until the last day of the first plan year on or after January 1st, 2022. Or, for governmental plans, January 1st, 2024.
Please understand that this is provided for educational purposes only. It applies to many, but not all qualified retirement plans. Please contact us to discuss the details of the CARES Act and how it applies to YOUR plan. We’re here to help.