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Home > Resources > Retirement Plans > CARES Act – Retirement Plan Loans & Distributions Relief For Employees

CARES Act – Retirement Plan Loans & Distributions Relief For Employees

March 31, 2020 by Jim Paul

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.  

In-Service Withdrawals

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).

Plan Loans

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.

Learn More: Benefits Management During The COVID-19 Crisis

 Your Employee Benefit Plans – What You Need To Think About Right Now

Filed Under: Retirement Plans Tagged With: Corona Virus Employee Benefits, Coronavirus CARES Act

About Jim Paul

Jim has done almost everything in the employee benefits arena, from 401(k) plan compliance and corrections to executive compensation, due diligence and counseling employers on benefits issues in mergers and acquisitions. The problems that he has not solved are few and far between. His clients rely on him for practical, efficient, effective guidance.
Learn More About Jim

EDITOR’S NOTE: We did the best we could to make sure the information and advice in this article were current as of the date of posting to the web site. Because the laws and the government’s rules are changing all the time, you should check with us if you are unsure whether this material is still current. Of course, none of our articles are meant to serve as specific legal advice to you. If you would like that, please call us at (916) 357-5660.

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