This is the first in a series of articles covering the employee benefits provisions of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), enacted March 27, 2020, that provides a variety of tax incentives for employers and employees. This article will focus on the retirement plan provisions.
Coronavirus-Related Distributions
The CARES Act makes a number of changes to the rules governing retirement plan distributions for certain plan participants termed “Qualified Individuals,” as described below. Each may withdraw up to $100,000 or 100% of their benefit from their employer’s plans as “Coronavirus-Related Distributions,” (“CRDs”). Employers may establish CRD withdrawals limits at less than the $100,000/100% level. CRDs must be taken on or before December 31, 2020. CRD withdrawals avoid the 10% early withdrawal penalty tax normally imposed on those who take distributions before attaining age 59-1/2. They are subject to a 10% automatic Federal income tax withholding (or withholding at other percentages or amounts elected by the Qualified Individual) CRDs may be taxed in 2020 or over a three-calendar year period. CRD withdrawals may also be paid back to the retirement plan from which they are taken within three years without regard to the contribution and deferral limits of the Internal Revenue Code which otherwise apply to plan contributions. For qualified retirement, 403(b) and governmental 457(b) plans, CRDs are optional, although we anticipate that employers with Qualified Individuals will be under a great deal of pressure to add them.
Coronavirus-Related Loans
Qualified Individuals may also receive a break on new defined benefit and defined contribution retirement plan loans taken within one hundred eighty days of the CARES Act enactment. The CARES Act increases the loan limits from $50,000 to $100,000. In addition, participants may receive up to 100% of their vested benefit in lieu of the normal 50% limit.
If a Qualified Individual had a loan outstanding or takes a new loan on or after March 27, 2020, the day of enactment of the CARES Act, payments due from March 27, 2020 to December 31, 2020, may be delayed for one year. The loan will be re-amortized and the period of suspension will be ignored for purposes of the five-year maximum term for plan loans.
Like Coronavirus-Related Distributions, Coronavirus-Related Loans may be adopted within the discretion of the plan sponsor. However, the tax consequences of loans apply regardless of the plan sponsor’s decision.
Qualified Individuals
Who is a Qualified Individual? A Qualified Individual is any individual who:
- Has been diagnosed with the SARS-CoV-2 or COVID-19 by a test approved by the Centers for Disease Control and Prevention (“CDCP”);
- Has a spouse or tax dependent who is diagnosed with the SARS-CoV-2 or COVID‑19 by a CDCP approved test; or
- Experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to the virus or disease, being unable to work due to lack of child care as a result of the virus or disease, or closing or reduction of business owned or operated by the individual as a result of the virus or disease, or other circumstances as determined by the IRS.
Plan fiduciaries may rely on certifications made by putative Qualified Individuals as to their status, but they may also set certification criteria in a non-discriminatory manner. If a spouse or dependent of a participant encounters adverse financial consequences, etc. as a result of COVID-19, the participant does not become a Qualified Individual. Both current and former employees can take advantage of CRDs. While the first two categories defining Qualified Individuals are relatively specific, the financial consequence category is quite broad. Millions of workers already meet the financial consequence criteria.
Required Minimum Distributions
In general, the required minimum distribution (“RMD”) rules require individuals who have attained age 72 (70½ before 2020) to receive a calculated minimum distribution from qualified retirement plans. Because of the steep decline in retirement account values and the requirement that the RMD for a year is calculated based upon the value of accounts as of the last day of the prior year, the CARES Act includes a waiver of the RMD requirement for 2020 for defined contribution plans and IRAs. It appears from the historical IRS policy that each plan sponsor can decide whether to adopt the RMD waiver. Those participants who may have already received an RMD may roll that RMD into an IRA or a qualified plan if they do so within 60 days of receiving the RMD. There is no RMD exception for defined benefit plans since the calculation of RMDs is not account-based.
Defined Benefit Plan Funding
Defined benefit pension plans are funded differently than defined contribution plans as alluded to above. The CARES Act provides that any single-employer defined benefit plan contributions otherwise required in 2020 are instead due January 1, 2021. The new rule applies to both mandatory quarterly contributions and “final” 2019 contributions which would generally be due by September 15, 2020. Deferred contributions accrue interest, however. In addition, plan sponsors may use the plan’s adjusted funding target attainment percentage (“AFTAP”) for the immediate plan year to determine the plan’s funded status for the 2020 year. Delaying contributions and using dated AFTAPs may result in higher contribution obligations for 2021 due to the manner in which funding rules work. It is possible that there will be additional defined benefit funding relief in future legislation.
Plan Amendments and Communication Responsibilities
For plan sponsors who decide to add some or all of the CARES Act retirement plan provisions to their plans, the amendments are not required to be made until the end of the 2022 plan year. In the case of governmental plans, amendments are not required until the close of the 2024 year. However, plan sponsors would be well advised to document their intent as to CARES Act changes before the final due date, perhaps in the form of an interim amendment. At the very least, plan sponsors should keep track in a written form of their compliance approach.
Another matter for employers to consider is how to communicate CARES Act changes. For plans subject to ERISA, a summary of material modifications is not due until two hundred ten days after the end of the plan year for which the change is effective. Most of the changes will have come and gone by that date. Practically speaking, employers will have to develop a CARES Act communication strategy and implement it soon. For Coronavirus-Related Distributions, employers of plans subject to ERISA must amend their plan loan administration procedures and documents to reflect these changes once decisions have been made.
If you have questions about the retirement plan provisions of the CARES Act, contact Bill Roberts at (502) 568-9364 or ebplans@hallrender.com or your regular Hall Render attorney.
Hall Render’s attorneys and professionals continue to maintain the most up-to-date information and resources at our COVID-19 Resource page, through our 24/7 COVID‑19 Hotline at (317) 429-3900 or by contacting your regular Hall Render attorney.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot—outside of an attorney-client relationship—answer specific questions that would be legal advice.
