On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The $2 trillion bill is the largest economic stimulus package in the history of our nation, with a broad range of provisions, from rebates for individual taxpayers to aid for the beleaguered airline industry. There are several provisions affecting employer-sponsored retirement plans that you plan sponsor clients need to be aware of.
The CARES Act allows for plans to offer coronavirus-related distributions of up to $100,000. To be considered coronavirus-related, the distribution must be made in the year 2020 by people who either:
- Have been diagnosed with COVID-19
- Have a spouse or dependent who has been diagnosed with COVID-19
- Experience adverse financial consequences as a result of being quarantined, furloughed, being laid off, or having work hours reduced because of the disease
- Are unable to work because they lack childcare as a result of the disease
- Own a business that has closed or been forced to operate under reduced hours because of the disease
- Or meet other factors determined by the Secretary of the Treasury
Such distributions are not subject to the 10% penalty tax for withdrawals taken before age 59½. They are not subject to mandatory tax withholding either. Participants have a 3-year window in which they can pay any distributions taken back into the plan. Also, any income taxes due on the distribution can be spread over a 3-year period or paid immediately at the plan participant’s discretion.
Qualified Plan Loans
The CARES Act also temporarily changes the rules for qualified plan loans. To be eligible for the new rules, the loan must be coronavirus-related and meet the same criteria as the coronavirus-related distributions discussed above.
The maximum loan amount has been increased from $50,000 to $100,000. Also, an individual can now borrow up to 100% of his or her vested account balance instead of the usual 50% limit. Any loan payments that would normally be due on the plan loan between March 27 and December 31 of 2020 can be delayed for up to one year without penalty. These payment suspensions will extend the maximum permitted term of the loan.
Required Minimum Distributions
The CARES Act waives all required minimum distributions (RMDs) from defined contribution plans for the calendar year 2020. This waiver is available for section 401(a), 403(a), 403(b), and governmental 457(b) plans and IRAs. Original account owners (as opposed to beneficiary account owners) who have already taken their 2020 RMDs are permitted to return them to their accounts as if they had not been taken.
Plan sponsors can start to offer the above changes immediately. However, eventually they will need to amend their plan documents to reflect the changes. They have until December 31, 2022, if they use a calendar year to adopt the amendments. If the plan uses a non-calendar year, then the deadline is the end of the plan year that starts in 2022. Government plans have until the end of 2024 to amend their documents.
Single-Employer Defined Benefit Funding Relief
Sponsors of single-employer defined benefit plans get a break from the CARES Act as well. It allows them to delay payments of minimum required contributions for the calendar year 2020. However, those payments must be made by January 1, 2021, with interest. The CARES Act also allows plan sponsors to use the plan’s adjusted funding target attainment percentage for the last plan year ending before January 1, 2020, as the percentage for plan years which include the 2020 calendar year.
How I Can Help
If you have clients that own businesses and sponsor retirement plans, they likely have much more demanding issues vying for their attention right now than their retirement plans. This is a stressful and difficult time for most business owners, as it is for their workers. Plan participants will want to start taking advantage of these provisions in the law even though your clients are busy with other areas of the business.
If your clients would like help in this tumultuous season, I can help with the retirement plan aspect of their business. I can help implement these changes so that plan participants have what they need to get by and amend plan documents in order to keep the plan compliant with ERISA. Email me today at firstname.lastname@example.org for more information about how we can partner together to help your clients through these difficult times.
About Kenny Phan
Kenny Phan is a Managing Partner at FinancialFocus Retirement Plan Services. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses around the nation, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.