Retirement Plan Update: The CARES Act Provides Relief for Retirement Plan Sponsors and Participants
Updated: April 1, 2020
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act. The Act is the largest economic disaster recovery and economic stimulus package in United States history, providing emergency assistance and health care response for individuals, families and businesses affected by the 2020 coronavirus (COVID-19) pandemic.
Individuals suffering financial hardship can make early withdrawals from retirement plans or IRAs of up to $100,000 without penalty.
- The CARES Act allows for early withdrawals from retirement plans or IRAs of up to $100,000 between Jan. 1, 2020 and Dec. 31, 2020 for individuals suffering a financial hardship related to COVID-19.
- Qualifying individuals may include individuals diagnosed with or have a spouse who is diagnosed with COVID-19. It will also include those who experience adverse financial consequences as a result of being quarantined, furloughed, laid off, having a reduction in work hours, inability to work due to lack of childcare, or owning and operating a business that has reduced hours or closure.
- The distributions will not be subject to the 10% early withdrawal penalty.
- Distributions will be includable as income for tax purposes, but the tax liability may be spread ratably over three years.
- Individuals will be permitted to repay the amount over three years without being subject to existing retirement plan contribution limits.
Action: Plan sponsors will need to decide whether they intend to reflect these optional provisions and should work with their plan participants to help them understand the options available. The participant’s certification for eligibility may be used to determine whether they are eligible to receive such distribution.
Retirement plan loan limits have been increased.
- Retirement plan loan limits for qualified individuals (as described in the section above) have been increased to the lesser of 100% of a participant’s vested account balance or $100,000 (previously 50% and $50,000 respectively) for loans made on or before Sept. 23, 2020.
- Additionally, qualified individuals may delay loan payments due between now and Dec. 31, 2020 by one year, effectively deferring all future loan payments by an additional year.
- Interest will continue to accrue on existing loan balances for the period of deferral, requiring loan payments to be adjusted in the future to accommodate the interest accrual.
Action: Plan sponsors will need to decide whether they intend to reflect these optional provisions and should work with their plan participants to help them understand the options available. For those participants choosing to defer loan payments, plan sponsors will need to ensure that loan repayments are correctly adjusted to reflect additional accrued interest.
Required Minimum Distribution (RMD) rules are temporarily waived.
- A waiver has been provided for required minimum distributions (RMD) that are otherwise required to be paid in 2020 from defined contribution plans or individual retirement accounts (IRA) including initial RMDs attributable to 2019, if not already distributed in 2019.
- If an RMD has already been received during 2020, the participant may roll the amount over to a qualified plan or IRA to defer the payment of taxes.
Action: Plan sponsors will need to decide whether they intend to allow plan participants to waive their 2020 RMD and ensure that payments resume properly beginning in 2021, absent any extension to this provision.
Retirement plan sponsors can now choose to provide relief provisions, even if they have not historically provided hardship distributions or participant loans.
- Plan sponsors have the option to choose whether or not to apply relief provisions.
- Relief provisions may be utilized immediately, but a plan amendment will be required by the last day of the first plan year beginning on or after Jan. 1, 2022 (Dec. 31, 2022 for calendar year plans).
- Plans that do not currently provide for hardship distributions or participant loans may do so provided the plan is amended by the date above.
Action: Plan sponsors will need to decide whether they intend to reflect these optional provisions, will need to operate their plan according to this decision, and ensure their plan is properly amended prior to the amendment due date.
Defined benefit plan funding deadlines have been extended to Jan. 1, 2021.
- The deadline for any required contribution due in 2020 has been extended to January 1, 2021. This includes minimum required contributions as well as quarterly contributions due in 2020.
- For calendar year plans, this extension includes the last 2019 quarterly (which was due Jan. 15, 2020), the final 2019 minimum contribution (otherwise due Sept. 15, 2020) and the first three quarterlies for 2020 (otherwise due April 15, July 15 and October 15).
- This extension applies to required contributions but does not extend the deadline for deduction purposes. Failure to contribute by the tax return deadline will result in increased tax liability for the year the contribution is attributable. The deduction will be carried forward to a future year.
- Contributions are charged interest through the date of deposit, so delaying a contribution will result in additional accrued interest.
Action: Defined benefit plan sponsors who have a contribution required in 2020 will need to determine whether they should delay their contribution deposit, considering both the impact on their tax liability and the additional interest expense.
Employers may use 2019 AFTAP certification to determine benefit restrictions applicable in 2020.
- Defined benefit plan sponsors may elect to treat the plan’s Adjusted Funding Target Attainment Percentage (AFTAP) for the last year ended before Jan. 1, 2020 as the AFTAP for plan years which include calendar year 2020.
- Any employers who were in the process of making a contribution to avoid benefit restrictions for a April 1 AFTAP determination may be able to avoid or delay that contribution since its prior year AFTAP will continue to stand (without the 10% April 1 reduction).
- The due date and form of this election is not clear at this time; or whether simply operating based on the 2019 AFTAP would constitute the election.
Action: Defined benefit plan sponsors should work with their actuary to determine the impact that this election will have on their plan’s operation as well as determine whether or not to defer payments that would otherwise have been made.
The ACT grants the DOL authority to extend ERISA due dates in the case of a national health emergency.
- Given this authority, the Department of Labor (DOL) may extend the deadline and eliminate (or delay) certain filings and / or participant notices.
- It is not clear whether the DOL will use this newly granted authority to extend the deadline for the Annual Funding Notice (AFN) generally required to be mailed to participants in plans with more than 100 participants within 120 days of the end of the play year (April 29, 2020 for 2019 calendar year plans).
Action: Until the DOL takes action to delay certain deadlines, plan sponsors should continue to provide notices and file returns otherwise due.
The CARES Act provisions are available immediately.
If you would like to utilize any optional provisions of the CARES Act, you may do so immediately. In order to ensure that these provisions are administered properly, it is important to work with your retirement plan consultant to inform them of your decision.
While the provisions of the CARES Act provide substantial relief in many areas, it is anticipated that additional bills containing significant retirement provisions and additional relief as well as guidance to clarify several provisions, such as the taxation of hardship distributions that are paid back to the retirement plan. Beyond this legislative relief provided by Congress, we also anticipate regulatory relief to be provided by the Internal Revenue Service (IRS), DOL, and other agencies over the next few weeks and months.
For More COVID-19 Information
We know you’re concerned about the impacts of COVID-19 on your retirement plan and your employees, but CBIZ Retirement Plan Services is here to help guide you through these turbulent times. Please contact the CBIZ RPS Technical Resource Center with any questions or concerns you have.
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