How the CARES Act Impacts Your Benefit Plans

When the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law, it contained many provisions impacting retirement plans. Highlighted below are the significant changes and planning strategies that we believe are important.

Distributions

In-service distributions are permitted for those impacted by the virus (Corona Related Distributions or CRDs) of up to $100,000 (without penalty for those under 59½ and taxed ratably over a three-year period) to participants who meet one or more of the following criteria:

  • Diagnosed with the virus SARS-Co-V-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention (CDC),
  • A spouse or dependent (as defined in section 152 of the Internal Revenue Code) is diagnosed with such virus or disease by such a test, or
  • Experience adverse financial consequences as a result of a quarantine, furlough, lay-off, reduction in work hours, business closure, or lack of childcare due to the corona virus emergency.

The plan administrator may rely on a participant’s certification that he or she satisfies any of these criteria. The 20% withholding requirement will NOT apply to CRDs and they can be paid back to an eligible retirement plan within three years of taking the distribution.

See our Q&A on Distributions.

Participant Loans—Repayment and Deferment Options

  • The maximum amount one can borrow from a plan has been temporarily increased to $100,000 (from $50,000). This borrowing window will be open until September 21, 2020 and can include 100% of a participant’s account balance. In order to be eligible for this increased limit, the participant must satisfy the requirements for CRDs above.
  • Repayment of participant loans is usually made by payroll deduction. For departing employees, this presents a problem because any unpaid loan balance may have to be treated as a non-cash distribution of benefits to the employee that is subject to income tax and possibly a 10% early distribution excise tax. The CARES Act provides for extending the payments at the request of the participant for up to 12 months. The request must be made prior to December 31, 2020. These repayments can be re-amortized with applicable interest added.
  • Consider placing employees on an unpaid leave of absence, or a furlough, rather than terminating employment. A furlough can postpone the participant’s loan repayment obligation for up to one year. Also bear in mind that participant loans can be repaid from severance compensation, if permitted.
  • Continuing employees with reduced work schedules may want to reduce or suspend their 401(k) contributions for the balance of the year, take out a participant loan, or make a hardship withdrawal, if permitted by the terms of the plan.

See our Q&A on Loans.

Required Minimum Distributions Waiver (applies to Defined Contribution plans only)

  • Participants who turned age 70½ prior to 2019 will not be required to receive an ongoing RMD for 2020.
  • Participants who turned age 70½ in 2019 and who did not receive their first RMD for 2019 on or before January 1, 2020 will not have to receive their first (2019) RMD or their 2020 RMD.
  • Beneficiaries receiving life expectancy payments will not be required to receive their 2020 beneficiary RMD.
  • Beneficiaries who have an account balance in the plan subject to the five-year distribution rule may extend their required distribution by one year (full distribution of the account must be made by the 6th anniversary of the participant’s death).
  • If a 2020 RMD is provided to any of the above, it may be rolled over to an IRA or employer plan.

Changes Related to Employer Contributions

  • C corporations will be able to defer making their 2019 defined contribution plan contributions along with the postponed deadline for filing their federal income tax returns.
  • Defined benefit plan minimum and quarterly contributions due in 2020 can be deferred until January 1, 2021. These amounts will be increased with accrued interest (but not penalty interest or excise tax) until their payment date.
  • Employee 401(k) deferrals still must be completed as soon as practicable and in no event later than seven business days of their withholding from employee compensation.

Plans providing employer contributions may want to reduce, discontinue, or change the timing of funding these contributions for the balance of the year. Plans with safe harbor contributions may also be suspended for the balance of the year by employers operating at an “economic loss” or by plan amendment if certain plan and notice provisions are satisfied.

In these unprecedented circumstances, there is no template for retirement plan sponsors or participants to follow. Any one of the above options may, or may not, apply to your particular situation. We encourage you to contact us to set up a time to discuss your plan and the options available.

See our Q&A on Employer Contributions.

Please contact your Miller Cooper representative if you have any questions.

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