On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) became law. The CARES Act provides widespread relief to employers and employees via tax credits and other approaches (e.g., extended tax due dates). This article focuses on provisions affecting retirement plans
- COVID-19 Distributions: The 10% penalty tax under Internal Revenue Code section 72(t), which generally applies to distributions received before age 59 ½, does not apply to any “coronavirus-related distribution” if the aggregate amount of such distribution(s) received by an individual does not exceed $100,000. This type of distribution is defined as any distribution from an eligible retirement plan (such as a 401(k) plan or 403(b) plan) that is made during 2020 to an individual: (1) who is diagnosed with COVID-19; (2) whose spouse or dependent is diagnosed with COVID-19; or (3) who experiences adverse financial consequences as a result of COVID-19 (e.g., being laid off or having his or her work hours reduced). The plan administrator can rely on a participant’s certification that he or she is in one or more of those categories. Also, unless the recipient elects otherwise, any such distribution required to be included in gross income will be so included ratably over the 3-taxable-year period beginning with the distribution year. Even better, to avoid that taxation, the recipient can contribute the distributed amount to the plan from which it came or to another plan (e.g., 401(k) plans and 403(b) plans) if that is done within three years from the distribution date. A plan amendment for this provision can be adopted with a retroactive effective date if it is adopted by December 31, 2022 (for non-governmental calendar-year plans). Calendar-year governmental plans have until the end of 2024 to adopt an amendment in this regard. Note that the plan must be operated in accordance with the amendment’s terms as of its effective date, whether or not that date is retroactive. Also, if a plan adopts this change, the plan sponsor should consider communicating the change to participants as soon as possible.
- Participant Loans: As a general rule, retirement plan participants can borrow up to the lesser of $50,000 or 50% of their vested account balance. The CARES Act replaces those amounts with $100,000 and 100%, respectively, if a participant in any of the three categories described above receives a loan from a qualified employer plan (such as a 401(k) plan or 403(b) plan) during the 180-day period beginning on March 27, 2020. Additionally, if a participant has an outstanding plan loan on or after March 27, 2020, and if the due date for any repayment occurs from March 27, 2020 to December 31, 2020, that due date can be delayed for one year. Under that delayed payment rule, subsequent loan repayments must be adjusted to reflect the delay as well as any interest accruing during the delay, but the delay will not count when determining if the loan was repaid by its original due date. The same plan amendment rules described above and my employee communications comment above apply to these new loan rules.
- Required Minimum Distributions: Participants generally must begin receiving distributions from their retirement plan by April 1 of the calendar year following the later of the year in which they attain age 72 or the year in which they retire. The CARES Act waives required minimum distributions that otherwise would have been due in 2020 with respect to certain plans (e.g., 401(k) plans and 403(b) plans). Moreover, any distribution made in 2020 that, but for the CARES Act, would have been a required minimum distribution will be eligible for rollover treatment. The same plan amendment rules described above and my employee communications comment above apply to these new rules.
I will update you as regulations and other guidance are published to expand upon those provisions.
Here is a link to the full text of the CARES Act: https://www.congress.gov/116/bills/hr748/BILLS-116hr748enr.pdf