Provisions Affecting Retirement Plan Distributions and Loans in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
The recently enacted Coronavirus Aid, Relief, and Economic Security Act (CARES Act) includes several provisions affecting retirement plan distributions and loans related to the COVID-19 virus that are discussed below.
Distributions: Eligible individuals can withdraw up to $100,000 for coronavirus-related purposes from tax-qualified retirement plans during 2020 without incurring the usual 10% early distribution penalty. Taxable distributions should generally be included in gross income ratably over a three-year period.
Taxpayers may recontribute the withdrawn amounts in one or more re-contribution payments to the qualified plan at any time within three years of the distribution. These repayments will be treated as a tax-free rollover and not subject to that year’s cap on contributions.
Coronavirus-related distributions are made to an individual (i) diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention; (ii) whose spouse or dependent is diagnosed with COVID-19 by such a test; or (iii) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.
A retirement plan administrator may rely on the employee’s certification that the Coronavirus-related distribution requirements are met.
Temporary Waiver of Required Minimum Distributions: The CARES Act temporarily waives required minimum distributions from IRAs, §401(k) plans, and certain other defined contribution plans for participants who were required to receive such distributions in 2020. The waiver does not apply to required beginning dates beginning in calendar years after 2020. This applies even for taxpayers who turned 70 ½ in 2019 but deferred their first RMD to April 1, 2020.
Waived RMDs do not need to be taken in subsequent years. However, any forgone RMD in 2020 will affect the account balance used to calculate the RMD in 2021 and future years. It is not known whether additional relief will be offered for individuals who took their RMD early in 2020 and are already outside the 60-day rollover window. RMDs were last waived in 2009. At that time, the IRS issued a notice stating that the 60-day rollover deadline would be satisfied if completed by a given date that year. It is possible that similar guidance will be issued this year.
Plan Loans: The CARES Act also makes it easier to borrow money from qualified employer plans, raising the borrowing limit from $50,000 to $100,000 for the first 180 days after enactment, and by delaying the payment dates for any loans due the rest of 2020 for one year. (The CARES Act was enacted March 27, 2020; the 180-day window closes September 23, 2020.)
Plans may increase the amount of loans available to employees who are eligible to receive Coronavirus-related distributions. Specifically, §2202(b) of the CARES Act provides that, during the 180-day period following the date of enactment (March 27, 2020), such employees may receive plan loans that do not exceed the lesser of $100,000 (increased from $50,000) or 100% (increased from 50%) of the present value of the employee’s nonforfeitable accrued benefit under the plan. The CARES Act also allows the due date for the repayment of any outstanding plan loans occurring between March 27, 2020, and December 31, 2020, to be delayed for one year. Plans adopting this provision must adjust subsequent repayments appropriately to reflect the delay in repayment and any interest accruing during the delay.
Plan Amendments: Please note that the distribution and loan provisions discussed above are optional. If your company decides to operate under these provisions, the company’s plan document does not have to be amended until the last day of the plan year beginning in 2022 (December 31, 2022, if the plan is a calendar year plan).
Other COVID-19 Relief Measures Regarding Retirement Plans
Due Dates for Contributions to Retirement Plans: The deadline for making contributions to an IRA, or for an employer to make contributions to its workplace-based retirement plan on account of 2019, is extended to July 15, 2020.
Single-Employer Plan Funding Rules: The due date for calendar year 2020 minimum required contributions is extended to January 1, 2021. However, delayed contributions must be increased by interest accruing for the period between the original due date for the contribution and the actual payment date, at the effective rate of interest for the plan for the plan year that includes the payment date. Plans under benefit restrictions as outlined in IRC §436 and ERISA §206(g) may elect to treat the plan’s adjusted funding target attainment percentage for the last plan year ending before January 1, 2020, as the adjusted funding attainment target for plan years that include the 2020 calendar year.
The information above in a chart format is also available here.