Knowing that many businesses and their employees have been dramatically affected by the effects of COVID-19, we want to provide you with information about some important retirement plan considerations, including information about the CARES Act. Please know that we at TSC stand ready to assist you. We’ve implemented significant remote capabilities so that our staff remains available to answer your questions and take care of your retirement plan needs. Please don’t hesitate to reach out to your TSC consultant with any questions you may have.
Retirement plan considerations related to the CARES Act
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) temporarily provides for new withdrawal options, new and existing loan options, and suspends 2020 Required Minimum Distributions (RMDs) for eligible defined contribution retirement plans. The following summarizes the key retirement provisions of the CARES Act.
Special COVID-19 Withdrawals
The CARES Act permits for the optional provision of “COVID-19-related” distributions of up to $100,000 through December 31, 2020. Importantly, these special distributions are not subject to the normal 10% penalty on early distributions. In addition, the distribution may be repaid at any time over the three-taxable year period that begins on the date the distribution was made. While these distributions are subject to ordinary income tax, individuals may spread out the tax liability over a three-year period beginning with the tax year the distribution occurred. These COVID-19-related distributions are available to “qualified individuals” which are defined as follows:
- Individuals who have been diagnosed with the virus SARS-CoV-2 or the Coronavirus disease 2019 (collectively, COVID-19) by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act
- Individuals whose spouse or dependent has been diagnosed with COVID-19
- Individuals who have experienced adverse financial circumstances because the individual, the individual’s spouse, or a member of the individual’s household:
- has been quarantined, furloughed, or laid off
- has had work hours reduced due to COVID-19
- been unable to work due to lack of child care due to such virus or disease
- had to close or reduce hours of business owned or operated by the individual due to such virus or disease
- Had a job offer rescinded or start date for a job delayed
Employers may rely on the individual’s representations regarding their status as a “qualified Individual” that is eligible for the distribution.
Loan Limit Increases
The CARES Act increases the maximum dollar amount available for loans from $50,000 to $100,000 or 100% of a participant’s vested account balance (if less than $100,000). These new loan limits are available only for loans made by September 23, 2020 and only for qualifying individuals as outlined above.
Payments to outstanding loans for the remainder of 2020 may be delayed for up to one year for qualifying individuals. Interest continues to accrue during the period and the plan can extend the term of the loan for up to one year.
Required Minimum Distributions (RMDs)
RMDs due in 2020 are not required for defined contribution qualified plans (401(k), 403(b), and governmental 457(b)) that adopt the CARES Act provision. This includes 2019 RMDs for which the required beginning date falls in 2020. Note that if an RMD was already processed in 2020, then the participant is permitted to roll it back into the plan or into an IRA. It is worth noting that this provision does not apply to defined benefit and cash balance plans.
Adoption and Application of the CARES Act Provisions
TSC plans to provide a sponsor level amendment to all of its clients’ plans to include the provisions of the CARES Act so that there is nothing its clients need to do should they want to take advantage of these new temporary provisions. However, the actual amendment doesn’t need to be adopted before 2022. Clients that do not want to include the new COVID-19 withdrawals and the increased loan limit provisions should notify their TSC consultant.