The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law on Friday, March 27, 2020. The CARES Act is a massive stimulus/relief package intended to help those individuals and businesses affected by the impact of the Coronavirus.
Below is a summary of the major provisions of the CARES Act relating to retirement plans.
It is important to note:
- As a plan is not required to provide for hardship distributions or plan loans, it appears that a plan is also not required to adopt the expanded distribution and loan provisions of the CARES Act.
- If a plan does adopt some or all of the new provisions, the plan must be amended, however the amendment is not required until the last day of the plan year that begins on or after January 1, 2022.
- A plan that does not currently provide for loans or in-service distributions, can adopt the distribution and loan provisions of the CARES Act.
Since a plan is not required to be amended for the new rules for almost two years after they would have been implemented, it will be important for a Plan Administrator to document how any of the CARES Act’s provisions were implemented to ensure the accuracy of the plan amendment.
Coronavirus-related Distributions
A qualified individual may request a distribution of up to $100,000 from their retirement plan account. The distribution would be:
- Exempt from the 10% pre-mature distribution penalty
- Includable in the participant’s taxable income (however the income is included ratably over the 3-taxable year period that begins with the year of the distribution, unless the participant elects to include the income all in the 2020 tax year)
- Allowed to be repaid to a retirement plan or IRA in one or more payments within 3 years of the date of the distribution (It is unclear at this time how repayments would be treated for the portion of the distribution that has already been included in income)
The distribution or distributions must be made before December 31, 2020, and the aggregate limit cannot exceed $100,000 from all plans of the Employer.
Qualified Individual: A coronavirus-related distribution is limited to a participant:
- Who is diagnosed with the COVID-19 virus by a test approved by the Centers for Disease Control and Prevention,
- Whose spouse or dependent is diagnosed with the virus by such a test, or
- Who experiences adverse financial consequences by:
- Being quarantined;
- Being furloughed or laid off or having work hours reduced due to the virus;
- Being unable to work due to lack of childcare;
- Being a business owner who has had to reduce hours or close the business, or
- Other factors as determined by the Secretary of the Treasury.
As your Self-Directed IRA Administrator, Vantage is permitted to rely on the participant’s certification that the participant satisfies the requirements above to have their distribution treated as a coronavirus-related distribution.
Qualified Plan Loan Provisions (i.e. 401K, 403b, 457, etc.)
The CARES Act allows the plan to increase loan limits and also delay payments for qualified individuals. A qualified individual would need to meet the same criteria as defined above for coronavirus-related distributions.
Increased Loan Limits
The CARES Act increases the loan limit from one-half of a participant’s vested balance to 100% of a participant’s vested balance. The CARES Act also increases the maximum dollar limit from $50,000 to $100,000.
The increased limits apply only to loans requested during the 180-day period that begins on March 27, 2020, and only for those participants that would be considered to be a qualified individual.
Delayed Repayment
For any qualified individual with an outstanding plan loan on or after March 27, 2020, loan payments due between March 27, 2020 and December 31, 2020 can be delayed for 1 year. Interest must accrue during the period of time that the payments are suspended.
Additionally, the 5-year maximum payback period for a loan with suspended payments under the CARES Act is extended by 1 year.
Temporary Waiver of Required Minimum Distribution Rules
Required minimum distributions (“RMD”) that would normally be distributed in 2020 are not required. This includes any participant whose first RMD was due by April 1, 2020 and did not make the distribution by that date. If a participant did take their first RMD before April 1, 2020, the waiver does not apply.
Please note that this provision of the CARES Act applies to participants in defined contribution plans and NOT to participants of defined benefit plans. However, it does apply to all defined contribution plan participants, and not just those meeting the “qualified individual” criteria discussed earlier. The intent of this provision is to allow participants time to recoup losses in their account that may have occurred due to the market’s reaction to the coronavirus before having to take their next RMD for 2021.
As of June 29, 2020…Updated guidance related to the CARES Act can be found here: IRS Notice Adds to Guidance on Waiver of 2020 Required Minimum Distributions