CARES ACT AND COVID
CARES Act Overview
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted into law by the President. Although this bill is meant to be a broad stimulus to help with the effects of our current health crisis and economic downturn, it does include several valuable retirement plan specific provisions:
Makes available a new coronavirus-related distribution option to provide increased access to retirement funds as well as provide relief for certain tax ramifications related to these distributions
Increases amounts available for plan loans
Provides loan repayment relief with a temporary suspension of payments
Waives 2020 required minimum distributions for plans other than defined benefit plans
Provides funding relief for single employer defined benefit plans
This page provides detail on each of the new provisions. Check below for other recent articles, employee communications samples, and FAQs coming soon.
Distributions and Loans Eligibility
In order to take advantage of any of the new distribution and loan rules and relief, a participant must be considered eligible by meeting one of following criteria:
The individual is diagnosed with the SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention (CDC)
The individual’s spouse or dependent (as defined in IRC Section 152) is diagnosed with the virus or disease
The individual experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, or having work hours reduced due to such virus or disease
The individual is unable to work due to lack of child care due to such virus or disease.
The individual is unable to work or is working reduced hours due to the closing or reduced hours of the business that is owned or operated by the individual due to such virus or disease
The law allows the Treasury Secretary to opine on other reasons that may be sufficient, but no further guidance has been issued at this time.
Plan Sponsors are permitted to accept a self-certification from the participant as to their eligibility. As such, the participant will not need to provide any additional documentation to support their qualification for the new provisions.
Participants who meet the criteria are eligible to take a newly established Coronavirus-Related Distribution (CVRD) from a qualified retirement plan or an IRA. CVRD amounts are limited to $100,000 per participant and apply only during 2020.
Distributions that qualify as CVRDs are eligible for the following special tax treatment:
The 10% early withdrawal penalty (if less than age 59.5) shall not apply.
Mandatory 20% federal tax withholding shall not apply.
The participant can choose to spread taxes equally over 3 years.
CVRDs can be paid back to the plan within 3 years of distribution.This would eliminate the tax consequences
Significantly, the law applied the special tax treatment retroactively to January 1, 2020. Although the waiver of 20% mandatory withholding cannot be retroactively applied, the other special tax treatments are available to any eligible participant.
The availability for CVRDs does not override the requirements that participants must be Age 59.5 to take in-service distributions from Money Purchase Pension or Defined Benefit Pension plans.
Increased Loan Limits & Repayment Relief
Participants who meet the criteria are eligible to take advantage of two new loan options:
Loan Limits. Under normal rules, participants are limited to the lesser of $50,000 or 50% of the vested account balance. CARES increases those limits to the lesser of $100,000 or 100% of his or her vested balance. These increased loan limits are available only for 180 days of enactment of the CARES Act.
Loan Repayment Relief. For new or existing loans, any payments that would otherwise be due between March 27, 2020 and December 31, 2020, can be suspended for one year. Interest does continue to accrue during the suspension period. If a participant is nearing the end of the maximum 5-year repayment term, the suspension will extend that maximum repayment period.
Required Minimum Distribution Waiver
Due to the significant market downturn, the CARES Act includes a provision that waives Required Minimum Distributions (RMDs) for 2020 otherwise required for applicable participants over age 70.5. The rationale is that because markets are already depressed, distributing an amount that was calculated on prior year values would be detrimental to account holders.
All 2020 Required Minimum Distributions (RMDs) may be waived in 2020. This applies to both corporate defined contribution Plans and IRA’s.
This also applies to first year 2019 RMDs that had an extended distribution deadline of April 1, 2020.
If an individual has already received a 2020 RMD, the individual may roll the amount over to an IRA or back into the plan.
To the extent that any qualified plan or IRA beneficiaries are required to receive amounts over a 5-year period, 2020 will not count and that period will be extended to 6 years.
This relief is not conditioned on any specific eligibility and will be available to all participants / IRA account holders. Similarly, this appears to be the only retirement plan portion of the CARES Act that is not optional. When RMDs were waived in 2009 due to the market downturn, the waiver was the default course of action for plans, with the option for participants to still receive distributions if they chose. We expect similar language to be incorporated for this plan change.
Defined Benefit Plan Funding Relief
The CARES Act provides the following funding relief for single-employer defined benefit plans (which includes Cash Balance plans):
Minimum required contributions due during 2020 can be delayed until January 1st, 2021.
Plan Sponsors can use their plan’s funded percentage for the immediately preceding plan year to determine the plan’s funded status for the 2020 plan year.
Implementation & Documentation
Ultimately, plan sponsors that choose to implement these options will be required to amend their plans by the end of the 2022 plan year. Practically, however, they can all be implemented as soon as processes and procedures can be updated.
In response to the new law, there has been a massive effort from the retirement plan industry to update recordkeeping platforms and participant communications and forms in order to allow for these provisions as soon as possible. However, it is clear from ABP’s communications with our recordkeeping partners that each recordkeeper is taking a slightly different route in implementing these options. Some platforms are using an opt-in approach while others are making the options available unless a plan sponsor opts out. Some platforms are restricting transactions to phone or paper transactions while others have been able to build out web-based options.
Given the complicated nature of these changes, as well as the need for guidance related to each plan’s specific financial institution, we encourage you to reach out to your ABP administrator regarding your preferences for the CARES Act provisions and any questions that you may have.
CARES Act - Employee Communications
Sample employee communications are included here for our clients to use if they are choosing to implement portions of the CARES Act.
For clients who are choosing to implement only the distribution provisions of the CARES Act
For clients who are choosing to implement only the loan provisions of the CARES Act
Distribs and Loans
For clients who are choosing to implement both the distribution and loans provisions of the CARES Act
CARES Act FAQs
Given the speed at which this new law is being implemented, there are bound to be questions from plan sponsors and advisors as we all move quickly to provide relief to plan participants. ABP is working on compiling some of the frequently asked questions as well as some questions for which we may not have enough guidance to answer at this time.
Check back for a full list of FAQs soon.