The Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law on March 27th, providing relief for employees in the form of expanded retirement plan loan and distribution options. Here’s what plan sponsors should know right now.
WHAT: The CARES Act provides a new in-service withdrawal option for certain retirement plans. Eligible participants may take distributions up to $100,000 from 401(k), 403(b) or governmental 457(b) plans (no specific relief is provided for money purchase or defined benefit pension plans; we will have to wait for IRS guidance to clarify).
WHO IS ELIGIBLE: Participants are eligible if they:
- Are diagnosed with coronavirus;
- Have a spouse or dependent who is diagnosed with coronavirus; or
- Suffer adverse financial consequences due to quarantine, furlough or layoff, reduced hours, inability to work while caring for children, if a business that is owned by the individual is closed or forced to reduce hours, or due to other factors to be determined by the Treasury Department.
Administrators are not required to verify eligibility and may rely on a participant’s statement that they are eligible. A plan sponsor must ensure that the total amount of all such distributions from any plan maintained by it or by any other employer that is a member of a controlled group or affiliated service group with the plan sponsor does not exceed $100,000 to any individual.
WHEN: These provisions apply to distributions taken by eligible participants in 2020. Plan sponsors may allow these in-service distributions in operation now and must amend their plans by January 1, 2022.
TAXES: The 10% early distribution tax will not apply. Income taxes may be paid over three years, and the distributions may be repaid within three years. The notice and rollover rules do not apply to these distributions. Mandatory 10% income tax withholding is required unless waived by the participant (20% withholding does not apply).
WHAT: Eligible participants (described above) may borrow up to the lesser of $100,000 or 100% of the vested account balance. Payments may be suspended for one year for new loans or existing loans outstanding in 2020. The five-year maximum loan term will not include the one-year suspension period. Interest will accrue during any suspension.
WHEN: These provisions apply to loans taken within 180 days after March 27, 2020, or by September 23, 2020. Plan sponsors may allow expanded loans in operation now and must amend their plans by January 1, 2022.
Required Minimum Distributions
WHAT: Required Minimum Distributions (RMDs) that are due in 2020 from defined contribution, 403(b) or governmental 457(b) plans by April 1 (participant reached age 70-1/2 in 2019) or December 31 are waived. The CARES Act provides no relief for RMDs from defined benefit plans.
WHEN: The RMDs described above are not required in 2020. If plan amendments are required, the deadline to amend will be January 1, 2022.