On Wednesday, March 25, 2020, the Senate agreed to a $2 trillion relief package designed to address the immediate, staggering effects of the COVID-19 pandemic on the United States. The stimulus package, dubbed the Coronavirus Aid, Relief and Economic Security (CARES) Act, was voted on and passed by the House of Representatives on Friday, March 27. President Trump signed the Act into law shortly after the House vote.
The CARES Act provides a significant cash infusion to hospitals and offers broader access to COVID-19 testing to individuals. The Act provides additional relief in the form of individual rebates, small business loans, expanded unemployment benefits, and a variety of tax breaks. It also includes provisions impacting defined contribution plans, defined benefit plans, and individual retirement accounts (IRAs), allowing increased and earlier access to retirement plan funds. Below are the key provisions affecting retirement plans:
Individuals may now withdraw up to $100,000 from retirement accounts without the 10% early distribution penalty, and without the required 20% federal tax withholding, so long as it qualifies as a coronavirus-related distribution (CRD). A coronavirus-related distribution is limited to:
- Individuals diagnosed with COVID-19;
- Individuals whose spouse or dependents are diagnosed with COVID-19;
- Individuals who experience financial hardship due 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 decided by the Treasury Secretary
The plan administrator may rely on the employee’s certification that they satisfy one of the eligibility conditions. Individuals are also permitted to pay tax on the income from the distribution ratably over a three-year period. The Act allows individuals to repay the amount into any eligible retirement plan over the next three years. Those repayments would be treated like a “rollover” contribution and also would not be subject to the retirement plan contribution limits.
The Act also provides an expansion of retirement plan loans to qualified individuals. Loans are limited to the lesser of $100,000, or the greater of $10,000 or 100% of the individual participant’s vested account balance. The increased loan amount is available for loans made during the 180-day period beginning on the date of the enactment of the CARES Act. Plan participants with an existing loan balance as of the date the CARES Act is enacted through December 31, 2020, can choose to delay their loan repayments for up to one year.
Waiver of Required Minimum Distributions for 2020
The CARES Act waives Required Minimum Distributions (RMDs) for the 2020 calendar year for defined contribution plans, including 401(k), 403(b), 457(b), and IRA plans. The waiver applies to 2019 RMDs due by April 1, 2020, and to 2020 RMDs. Waived RMDs may be rolled over if a distribution is taken. Current law states that individuals generally at age 72 (the law previously required this for individuals over age 70-1/2 in years prior to 2020) must take RMDs from qualified retirement plans and IRAs.
Single-Employer Defined Benefit Plan Funding Rules
The legislation includes a provision to provide single-employer defined benefit plan funding relief by giving companies more time to meet funding obligations by delaying the due date for any contribution due during 2020 until January 1, 2021.
Tax Return and Contribution Deadline Extended
The Act extends the deadline for taxpayers with an April 15, 2020, deadline to July 15, 2020. This will allow these taxpayers to fund their retirement plan contributions by July 15 instead of April 15.
Department of Labor’s Authority Expanded to Allow Postponement of Some Deadlines
The Act grants the Department of Labor additional authority to postpone specific deadlines under ERISA (including Form 5500 due date, participant statements and participant notices). The legislation expands the scope of circumstances to include a public health emergency. Previously, the rules provided for only military or terroristic action to grant DOL those postponed deadlines.
The law permits retirement plans to adopt these rules immediately, regardless of whether the plan currently does not allow for loans or hardship distributions, provided the plan is amended retroactively on or before the last day of the first plan year beginning on or after January 1, 2022, or later if prescribed by the Treasury Secretary.
The information provided above reflects the cumulative efforts of Congress to provide much-needed relief for individuals and businesses. These provisions will likely offer immediate assistance for plan participants, while also offering plan sponsors flexibility. As always, Aldrich seeks to provide current, salient information as it emerges and we have been in communication with our recordkeeping partners to determine their ability to accommodate the amendment in their recordkeeping system and process transactions accordingly. Please reach out to your Aldrich Advisor for additional information.