On Friday afternoon the President signed into law an unprecedented $2 trillion stimulus bill to rescue the U.S. economy, including retirement plan provisions which will bring relief to many participants and employers alike. It is called the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
As for the retirement-based provisions, it eases retirement plan hardship and loan rules to free up funds for individuals impacted by the pandemic and provides relief from the required minimum distribution (RMD) rules. The final bill also adds funding relief for single-employer defined benefit plans. Following is a quick summary of some of the key provisions for retirement plans:
Hardship Distributions: The CARES Act waives the 10% early withdrawal penalty tax on early withdrawals of up to $100,000 from a retirement plan (includes all plans of the employer or Related Group of employers) and/or IRA for an individual who:
- is diagnosed with COVID-19;
- whose spouse or dependent is diagnosed with COVID-19;
- who experiences adverse financial consequences 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 determined by the Treasury Secretary
The plan administrator may rely on the employee’s certification that he/she satisfies one of these conditions. The legislation also permits those individuals to pay tax on the income from the distribution ratably over a three-year period and allows individuals to repay that amount tax-free back into the plan over the next three years. Those repayments would not be subject to the retirement plan contribution limits.
Plan Loans: The Act doubles the current retirement plan loan limits to the lesser of $100,000 or 100% of the participant’s vested account balance in the plan (currently the lesser of $50,000 or 50% of the participant’s vested account balance). Individuals with an outstanding loan from their plan account with a loan payment due from the date of the Act’s enactment through December 31, 2020 can delay their loan repayment(s) for up to one year.
Plan Amendments: The legislation further permits retirement plans to adopt these rules immediately – even if the plan does not currently allow for hardship distributions or loans – provided the plan is amended 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.
Temporary Waiver of Required Minimum Distribution Rules (RMDs): CARES waives RMDs for the calendar year 2020 for defined contribution plans, including 401(k), 403(b), 457(b), and IRA plans, allowing individuals to keep funds in their retirement plan account. Under current law, individuals (generally at age 72) must take an RMD from these types of plans and IRAs.
Single-employer DB Plan Funding Rules: In the final bill is a provision to provide single-employer defined benefit plan funding relief by giving companies more time to meet their funding obligations by delaying the due date for any contribution otherwise due during 2020 until January 1, 2021. At that time, contributions that were due earlier would be due with interest.
Expansion of DOL Authority to Postpone Certain Deadlines: The legislation provides the Department of Labor with expanded authority to postpone certain deadlines under ERISA. In general, the legislation increases the circumstances to go beyond a terroristic or military action to also include a public health emergency declared by the Secretary of Health and Human Services under the Public Health Service Act.
What might be next? The American Retirement Association (ARA) has asked the IRS and DOL for the following items outside the current legislation: to postpone the deadline on Form 5500 filings, the correction of failed ADP and ACP tests, and distributing excess contributions. In addition, the ARA asks Treasury to help employers facing financial burdens from needing to terminate their retirement plan and… instead of plan termination… providing a way to temporarily freeze the plan until business recovers, including:
- Modify the regulations to provide that safe harbor contributions may immediately stop accruing upon an employer memorializing such intent (formal or informal). The employer would need to notify eligible employees within 90 days of the reduction or cessation. In addition, a formal plan amendment could be adopted no later than the last day of the plan year to which the cessation or reduction applies.
- To address the increased risk of participant loan defaults, plans sponsors should be able to change the date of default from the date of termination of an employee, to a later date that is not earlier than Dec. 31, 2020.
- The IRS should issue guidance clarifying that the current national emergency is a federally declared disaster as described in the Treasury regulations for hardship distribution purposes, and
- The IRS should provide a temporary relaxation of administrative requirements for hardship withdrawals and loans, including self-certification by the participant, if the employer, plan administrator or other individual is not available.
The CARES Act provides important benefits for both employers and employees, and future actions by the IRS and DOL could help us all navigate our way through the difficult days ahead. While the Act has been signed, the impact of the legislation from an administration standpoint will begin to be felt over the days and weeks ahead. While we wanted to communicate the highlights as soon as possible, in the near future we will provide additional information about specific changes to the plan document and administrative procedures that you may elect to apply to your retirement plan. In this (Coronavirus Stimulus Bill) regard there will be more to come by the end of this week.
NOTE: A big thank you to Ted Gadbout of The American Society of Pension Professionals and Actuaries (ASPPA) as the source of this information.
contact us for more details.