Business and Financial Planning Impact of the CARES Act
On March 27th, the House of Representatives approved the COVID-19 bill, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), and President Trump signed it into law. The CARES Act makes targeted changes to provide relief to participants in employee benefit plans. Following are the key provisions in the CARES Act as passed:
Coronavirus-Related Distributions
Qualified 401(k), 403(b), profit sharing, and governmental 457(b) plans may permit a new in-service retirement plan distribution option called a “Coronavirus Related Distribution.” This relief is offered through December 31, 2020.
These distributions are subject to the following requirements:
Limited to $100,000 per tax year, aggregated across all plans sponsored by the employer or a member of the controlled group of employers.
Not subject to the 20% mandatory federal tax withholding upon distribution since the distribution is not eligible to be directly rolled over into an IRA or another qualified plan.
Exempt from the 10% early withdrawal penalty.
Eligible to be paid back to the plan as rollover contributions or indirectly rolled over into an IRA or another employer plan within 3 years from the date the distribution is taken.
Amounts not indirectly rolled into an IRA or employer plan are included in gross taxable income, ratably, over 3 years (beginning with the tax year of the distribution), unless the participant elects to include all amounts in a single tax year.
Coronavirus-related distributions are available to “eligible” participants who:
Are diagnosed with a coronavirus (COVID-19 or SARS-CoV-2) illness (via test approved by the CDC).
Have a spouse or dependent diagnosed with a coronavirus illness.
Experience “adverse financial consequences” as a result of a quarantine, furlough, lay-off, reduction in work hours, business closure, unable to work due to lack of child care, or other factors determined by the IRS due to the coronavirus emergency.
A plan administrator may rely on a participant’s certification of the above.
Coronavirus-Related Loan Relief
Two types of loan relief are also provided:
Plans may allow eligible participants, as defined above, to take loans up to the lesser of $100,000 or 100% of the participant’s vested account balance (this is double the normal limits). This is available on loans taken now through September 23, 2020.
Upon the request of an eligible participant, plan sponsors may suspend loan repayments due on outstanding loans that are in good order for a period of up to 12 months, this applies to payments due from March 27, 2020 through December 31, 2020. This relief expires on December 31, 2020. The suspension period is to be added to the original loan term when repayments, including accrued interest, resume, regardless of the length of the loan’s original term.
Waiver of 2020 Required Minimum Distributions (RMDs)
Qualified 401(k), 403(b), profit sharing, governmental 457(b) plans, and IRAs will not be required to make any RMD payments for 2020. This also includes RMDs that were due for 2019 by April 1, 2020. If a 2020 RMD was processed, it may be rolled over to an IRA or employer plan. This waiver does not apply to defined benefit plans.
Defined Benefit/Cash Balance Plan & Money Purchase Pension Plan Funding Relief
The Act allows any defined benefit/cash balance plan or money purchase pension plan contributions due during 2020 to be delayed until January 1, 2021; however, interest will accrue (payable to the plan) on any delayed contribution.
A plan sponsor may elect to apply the plan’s funded status for the 2019 plan year in determining the application of benefit restrictions for plan years which include calendar year 2020.
Timing of Plan Amendments
The CARES Act includes a remedial amendment period giving plan sponsors additional time to amend their plans for this relief. Sponsors of non-governmental plans have until the last day of the plan year beginning in 2022 to amend their plans, i.e., December 31, 2022 for a calendar year plan. Sponsors of governmental plans have until the last day of the plan year beginning in 2024 to amend their plans. This amendment deadline applies to both mandatory provisions under the CARES Act (i.e., waiver of 2020 RMD payments) and any optional provisions that a plan sponsor chooses to implement.
