The CARES Act was the third phase in Congress’ response to the COVID-19 following the Corona Virus Preparedness and Response Supplemental Appropriations Act, 2020 and the Families First Coronavirus Response Act (FFCRA). In addition to providing emergency relief for the millions of small businesses in the country, the 2 trillion CARES Act, also relaxed several retirement plan rules which helped the plan holders to gain some access to their account balances without penalty. The Client Alert focused on the retirement plan provisions under the act, which was quite and still is very crucial to helping the financially strained participants to safely navigate the harsh COVID-19 environment.
Penalty Waived For Early Withdrawals
One provision under the CARES Act that perhaps has benefitted most participants is the fact that they can make early withdrawals from their retirement plans without being penalized. The Act waives the 10% early withdrawal penalty under section 72(t) of the Internal Revenue Code of 1986, as amended (the “Code”) on pre-59 ½ distribution from the tax-qualified retirement plans and individual retirement accounts, as long as the distribution doesn’t exceed $100,000 and the participant falls within one of the following categories;
- Individuals diagnosed with COVID-19 by a CDC-approved test.
- Individuals whose spouse or dependent is diagnosed with COVID-19 by a CDC-approved test.
- An individual who “experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours due to” COVID-19.
- An individual who is unable to work due to COVID-19 child care issues.
- An individual who has closed or reduced hours in a business owned or operated by the individual.
- An individual who has experienced other factors as determined by the Secretary of the Treasury.
An individual’s distribution may be re-contributed to the distributing retirement plan, or even to another plan within three years after the date of the distribution is received, without regard to any plan limit on contributions. Supposo9ng that the individual does not make re-contribute the distribution within that time frame, taxation on the distribution may be spread over a three-year period. The Federal income tax withholding is not required on a Coronavirus-related distribution. Direct rollovers need not be offered.
Plan Loan Rules Relaxed
One of the Codes amended under the CARES Act was Section 72(p) to increase the amount that participants are able to borrow from their individual accounts under defined contribution plans. Historically, the Code has limited loans to the lesser of $50,000 and 50% of the participant’s vested account balance. The Act also increased the 50% cap to 100% for purposes of determining loan availability. Further, the $50,000 dollar limit for loans increased to $100,000 for “qualified individuals” made during the 180-day period beginning 3/27/20 and ending 12/31/20.
The due date for any repayment by a “qualified individual” for the loans taken from March 27, 2020, through December 31, 2020, is delayed for up to one year. Later repayments for the loans will also be adjusted appropriately to reflect the prior delayed due date and interest accruing during such a delay. However, the delay period will be ignored in determining the 5-year maximum period for such loans.
A “qualified individual” who could be eligible for these expanded loan limits and loan delays is the one who could also meet the same coronavirus-related tests as discussed above for coronavirus-related distributions.
Required Minimum Distribution Waived
Last year, the required minimum distribution had been suspended. Accordingly, the minimum distribution otherwise required in 2020 from defined contribution plans need not be made. These are the amounts that the IRS required to be distributed from retirement arrangements beginning April 1 of the calendar year following the later of the calendar year in which the individual attains age 72 or retires.
The waiver applies to:
- Defined contribution 401(a) qualified plans.
- Defined contribution 403(a) and 403(b) plans.
- Governmental defined contributions 457(b) plans.
A plan sponsor may have the discretion to determine whether this provision will be implemented.
Delayed Defined Benefit Plan Funding
The CARES Act also permits single-employer defined benefit (DB) plans to delay the due date for any contribution otherwise due during 2020. On January 1, 2021, the contribution for 2020 is due with interest. A DB plan’s status for benefit restrictions, as of Dec. 31, 2019, will apply throughout 2020. A plan sponsor may elect to treat the plan’s adjusted funding target attainment percentage for the last plan year ending before Jan. 1, 2020, as the adjusted funding target attainment percentage for plan years which include the calendar year 2020.
The CARES Act also provides for the immediate adoption of these provisions even if the plan does not currently allow for all in-service distributions or loans. However, plans must be amended on or before the last day of the first plan year beginning on or Jan. 1, 2022 (January 1, 2024, for governmental plans) or later, if prescribed by the Treasury Secretary. This CARES Act was fast-tracked in order to provide COVID-19 assistance as quickly as possible. There may be technical corrections to address any mistakes in the rush to enactment.