CARES Act Impact on Retirement Plans

By Janice Fortin, CPA, MST – Shareholder, Employee Benefits Plan Group

Among the many relief measures of the CARES Act are retirement plan provisions, which are helpful to both individuals and employers to free up access to cash flow during these unprecedented times. Explore the benefits of these provisions outlined below.

Penalty-Free Participant Loan Distributions and Loan Repayment Deferrals

Normally, the Internal Revenue Service (IRS) would impose a 10% tax in addition to an individual’s income tax rate on early distributions from 401(k), 403(b), employee stock ownership plans (ESOPs), simplified employee pensions (SEPs) and other plans meeting the requirements of Section 401(a). The CARES Act allows plan sponsors to adopt a provision to allow participants, who meet the below criteria, to access additional retirement funds by increasing the loan limit to the lesser of $100,000 or 100% of the participant’s vested balance for loans established up to 180 days from the enactment date (on or before Sept. 23, 2020).

Qualifying Participants

These provisions are available to participants who meet one of the following criteria:

1. 1. Participants, if they themselves, their spouse or their dependent(s) have been diagnosed with COVID-19.
   2. Participants who have experienced a heavy financial burden as a result of layoff, furlough, reduction in work hours as an employee, the closing of a participant’s business or reduction in work hours as a business owner, or the inability to work due to lack of child care as a result of COVID-1.

Keep in mind you will still receive a 1099-R and be taxed at your normal income tax rate.

Furthermore, participants with existing loans may choose to defer their loan repayments with a due date from the enactment date through Dec. 31, 2020, for up to one year. The maturity date of the loan can be extended for the same period as the deferment of loan repayments up to one year. The loan does, however, continue to accrue interest on the outstanding balance during the deferment period.

Plan sponsors need to ensure such participant loans do not become in default during the deferment period.

Required Minimum Distributions (RMDs)

For the 2020 calendar year, defined contribution retirement plans’ requirement to process RMDs will be waived to prevent requiring participants to liquidate devalued investments from their participant accounts, if the participant is above 70 ½ years old. If participants have already received a 2020 RMD, they may be eligible to roll over the RMD back into an IRA or other qualified plan.

Employer Funding Relief

For defined benefit plans, the due date for any required contributions during 2020 has been extended to Jan. 1, 2021 to provide relief funding shortfalls they may face if their plan’s asset valuations are decreasing due to financial market volatility. Any required contributions that are deferred beyond the original due date will accrue interest at the plan’s rate of interest. In addition, defined benefit plans will be allowed to use the previous year’s adjusted funding target attainment percentage for 2020.

Plan Amendments

As a plan sponsor, you may be wondering if you need to amend your plan for these changes. If your company decides to leverage these distribution and loan provisions, eventually, a plan amendment will be necessary. For now, administrators can operate their plans in accordance with these new rules and amend them no later than the last day of the first plan year beginning on or after Jan. 1, 2022.

For any questions regarding these provisions, please contact a member of Doeren Mayhew’s Employee Benefits Plan Services Group.