Retirement Plan Services: Summary of CARES Act

Retirement Plan Services: Summary of CARES Act

By: Kim Matus, Retirement Associate

On Friday afternoon, March 27, Congress passed, and the President signed, the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Act provides sweeping legislation intended to provide much-needed relief due to the coronavirus public health emergency. At nearly 1,000 pages in total, the legislation is quite comprehensive. With respect to company-sponsored retirement plans, optional relief available for 401(k) plans is described in the summary below.

Distribution Options

The CARES Act allows the plan to adopt a new type of distribution which can be taken by participants who are still employed as well as participants who have separated from service or who are furloughed. If adopted, the permissible provisions are.

  • Maximum amount which can be withdrawn is $100,000.00 for the calendar year 2020. The Plan Sponsor may allow for a lesser amount.
  • The 10% early withdrawal penalty is waived.
  • The mandatory 20% federal tax withholding from the distribution can be waived. The distribution will be taxable to the participant but can be, at the participant’s discretion, optionally spread over 3 tax years.
  • The distribution can also be repaid to the same retirement plan, another retirement plan or an IRA over a course of 3 years, if the participant elects to do so. Any repayment would be considered a rollover.

Loan Options

The CARES Act allows the plan to increase the maximum amount a participant can borrow against his or her 401(k) account, and time needed to repay the loan. If adopted:

  • The current $50,000 maximum can be increased to $100,000. The Plan Sponsor may allow for a lesser amount.
  • The current restriction of 50% of the vested balance can be increased to 100%. The Plan Sponsor may allow for a lower vested balance.
  • IMPORTANT – The increase on loan limits will only last until September 23, 2020 – 180 days after the enactment of the CARES Act.
  • The repayment period, for both new and existing loans, can be postponed by up to one year. Interest will continue to accrue.

Even if adopted by the plan, these reliefs are only available to participants who:

  1. Have been diagnosed with Covid-19,
  2. Whose spouse or dependent has been diagnosed with the Covid-19,
  3. Who experiences financial adversity due to being quarantined, laid off, furloughed or having work hours reduced due to the Covid 19; or,
  4. Who is unable to work due to loss of childcare, related to the Covid-19

Another relief provision included in the Act pertains to Required Minimum Distributions (RMD). The CARES Act removes the requirement of participants who normally would need to receive an RMD in 2020. If a participant has already received their RMD for 2020, they have the option to roll the funds back into the plan or into an IRA. There is no requirement for participants to be directly affected by Covid-19 in order to have their 2020 RMD waived. The reasoning behind this item pertains to the fact that account balances on 12/31/2019 were most likely significantly higher than they have in 2020, year-to-date. RMDs for 2020 would be calculated on 12/31/2019 balances, thus requiring a much larger percentage of their account being distributed to them, resulting in an undue tax burden for the 2020 tax year.

If your company would like to enact any or all of the above types of relief, an amendment is required. However, the deadline is not until December 31, 2022. If you are interested in providing these types of assistance to your participants, please contact us as soon as possible so that we may assist in your efforts.