How the CARES Act Affects Defined Contribution Retirement Plans
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) offers new rules for loans and distributions made during the 2020 calendar year:
- In order to be eligible for any of these new distribution rules, participants must be “qualified,” meaning they are diagnosed with COVID-19 by a CDC-approved test; have a spouse or dependent who is diagnosed; or experience “adverse financial circumstances” by being quarantined, furloughed, laid off, given reduced hours, or unable to work by a lack of child care due to the virus or disease. Plan administrators can rely on a participant’s statement that s/he meets these requirements.
- Participants can take loans from their retirement plan for the lesser of up to $100,000 or the vested present value of their account; in other words, the maximum permissible loan amount has been doubled. Repayment can be delayed for up to one year with repayments and interest adjusted accordingly. Participants who currently have an outstanding loan with a repayment due after enactment of the CARES Act can also delay their loan repayment(s) for up to one year.
- Distributions to qualified participants can be made for up to $100,000 with the 10% early withdrawal penalty tax waived. Additionally, the distribution amount can be included in gross income over three years. Participants can repay any distribution back into their retirement plan so that they are not locking in their losses and those repayments would not be subject to the retirement plan contribution limits.
- Required Minimum Distributions (RMDs) for defined contribution plans can be temporarily waived, allowing participants to keep funds in their plans.
- Cash balance plans have more time to meet their funding obligations by delaying the due date for contributions during 2020 until January 1, 2021. At that time, contributions will be due with interest. Plans that have not been fully funded as of December 31, 2019, and therefore have benefit restrictions, can continue to apply those restrictions throughout 2020.
- Plans can adopt these rules immediately even if the plan does not currently allow for hardship distributions or loans, as long as the plan is amended on or before the last day of the first plan year after January 1, 2020. We can assist you in making any plan amendments.
The CARES Act gives the Department of Labor expanded power to postpone certain deadlines, and we can likely expect more guidance soon. There is a chance the 5500 filing deadline will be extended as well.
Vestwell is not a law firm or tax advisor. Participants may wish to consider hiring their own professional before making any changes to their retirement plan, as there could be tax consequences and other adverse impacts on their retirement plan.
For more helpful ideas on how to manage your workforce during the Coronavirus pandemic, as well as breaking news coverage, check out our COVID-19 Crisis Resource Center.
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