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CARES Act: Retirement Plan Relief

April 6, 2020

By now, many have heard of the Coronavirus Aid, Relief, and Economic Security (CARES) Act and professionals continue to decipher its various nuances.  One important aspect that has not received as much attention is the relief provided to retirement plans and access to funds by individuals.  The following represents a summary of those changes.

Eligibility

  • Participants who have been diagnosed, or have a spouse or dependent (as defined in Section 152 of the IRS Code) who has been diagnosed, by a test approved by the Centers for Disease Control and Prevention (CDC), with the virus.
  • Participants experiencing adverse financial consequences as a result of the following:
    • being quarantined
    • being furloughed or laid off, or having work hours reduced due to such virus or disease
    • being unable to work due to lack of child care due to such virus or disease
    • closing or reducing hours of a business owned or operated by the individual due to such virus or disease

Special hardship distributions

The CARES Act provides rules for the optional provision of special coronavirus-related distributions from eligible retirement plans and IRAs.

  • Allows for distributions, not to exceed $100,000 made after January 1, 2020 and before December 31, 2020.
  • The distribution would not be subject to the 10% penalty on distributions to individuals who have not yet reached age 59-1/2.
  • A plan can rely on a participant’s self-certification of his or her eligibility for the distribution.
  • The distribution can be spread out for tax purposes ratably over the three taxable years beginning with the taxable year of the distribution to the extent that the distribution is not repaid.
  • These distributions will be treated as satisfying the requirements for hardship distributions from a 401(k) plan.
  • Amounts distributed can later be repaid to a qualified plan or an IRA, provided it is an account to which a rollover contribution could be made. Any amounts repaid avoid income recognition.
  • The repayment of the distribution can be made at any time over the three-year period that begins on the date the distribution was received.

Plan Loans

  • Increases the maximum dollar amount available for loans from tax-qualified plans from $50,000 to $100,000 for loans made during the 180-day period beginning March 27, 2020.
  • Increases the maximum percentage limit for loans from 50% of the present value of a participant’s nonforfeitable accrued benefit to 100% of the present value of a participant’s nonforfeitable accrued benefit under the plan.
  • The new due date for any plan loan with a current due date beginning on the date of the enactment of the CARES Act and ending on December 31, 2020 will be extended for one year.

Required Minimum Distributions

Allows a one-year delay in required minimum distributions (RMDs) from 401(a), 403(b), 457 plans, as well as from IRAs. This delay applies to RMDs due April 1, 2020, as well as to 2020 RMDs. In addition, the Act permits amounts subject to the RMD rules in 2020 to be rolled over.

Information for Plan Sponsors

Changes can be implemented and become effective immediately.  Formal amendment to the applicable plan document is not required until on or before the last day of the first plan year that begins on or after January 1, 2022.   

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