Our society continues to be affected by the COVID-19 pandemic and employers are confronted with difficult decisions regarding staffing and expense reductions. These decisions often negatively impact employees and their families.
The recently passed Coronavirus Aid, Relief and Economic Security (CARES) Act provides relief to qualified individuals through increased access to their retirement savings. Furthermore, the CARES Act provides funding relief to plan sponsors of defined benefit plans.
Below is a summary of the changes specific to Defined Contributions Plans [401(k), 403(b), profit sharing and Governmental 457(b) plans] and Individual Retirement Accounts (IRAs) contained within the CARES Act.
- Coronavirus-Related Distributions (CRD) may be offered to qualified individuals (as defined below), allowing withdrawals up to $100,000 for amounts distributed before the last day of 2020. These distributions are not subject to the 10% premature distribution penalty but are subject to income taxes; however, the taxes may be spread over a three-year period. CRD distributions may be recontributed within three years as a rollover to the defined contribution plan without impacting contribution limits or an IRA. The addition of Coronavirus-Related Distributions is optional and plan sponsors will need to elect to add this provision to their plan prior to providing this relief.
- Participant Plan Loan limits may be increased from $50,000 or 50% of the vested account balance to $100,000 or 100% of the vested account balance for the next six-month period. Loan payments due between March 27, 2020, and December 31, 2020, may be delayed for one year; however, interest will continue to accrue. The loan provisions contained within the CARES Act are available for qualified individuals (as defined below) only. The addition of these loan provisions are optional and plan sponsors will need to elect to add these provisions to their plan prior to providing this relief.
- Required Minimum Distributions (RMD) are addressed within the CARES Act. The Act provides for a temporary waiver of RMD rules for distributions required in the 2020 calendar year from defined contribution plans and IRAs. This provides relief to participants who would otherwise be required to withdrawal funds from their retirement accounts. Participants still have the option to request their 2020 RMD; however, the ability for a participant to waive their 2020 RMD is a mandatory provision.
The Coronavirus-Related Distribution and the loan provisions contained within the CARES Act are available only for qualified individuals. A qualified individual is defined as an:
- Individual who is diagnosed with COVID-19 by a CDC-recognized test,
- Individual whose spouse or dependent is diagnosed with COVID-19 or
- Individual who experiences adverse financial consequence as a result of:
- Being quarantined
- Being furloughed or laid off
- Having work hours reduced
- Being unable to work due to lack of childcare as a result of COVID-19
- The closing or reduction of hours of a business owned or operated by the individual
Plan sponsors may rely on an individual’s self-certification that they are eligible to receive a Coronavirus-Related Distribution or increased participant plan loan. There is no additional substantiation or verification requirement for plan sponsors.
Plan sponsors should keep in mind that these provisions are optional, except for the RMD waiver. Retirement plans may adopt the provisions immediately and implement the amendments later, but no later than the last day of the 2022 plan year. It will be important to keep in communication with plan recordkeepers and third-party administrators (TPA) regarding these operational changes to plans resulting from provisions made available by the CARES Act.
Below is a summary of funding relief for Defined Benefit Plans:
- The CARES Act allows single-employer defined benefit plan sponsors to delay any contributions due in calendar year 2020 until January 1, 2021. The CARES Act requires deferred contributions to accrue interest from the original minimum required contribution due date until paid.
- Plan sponsors may use the adjusted funding target attainment percentage (AFTAP) from the last plan year ending before January 1, 2020, and for plan years that include calendar year 2020. Employers thus may be able to avoid or mitigate adverse consequences related to any declines in the pension plan’s AFTAP during calendar year 2020.
Plan sponsors with single-employer defined benefit plans should understand these pension provisions are optional. The key will be to quickly come up with an action plan to either make contributions on their original due dates or delay the contributions.
Plan sponsors should also be aware that the CARES Act allows the Employee Retirement Income Security Act of 1974 (ERISA) to give the Department of Labor (DOL) the ability to postpone filing deadlines under applicable ERISA provisions for retirement plans affected by a public health emergency. We will monitor for more information to come on the filing deadlines.
As a plan sponsor, you may have questions as you start to implement these new changes to retirement plans. CSH’s Benefit Plan Administration & Consulting Advisors are here to help you stay compliant, manage risk and make smarter decisions during this economically challenging time.
Looking for more information about the impact of coronavirus on businesses? Visit our COVID-19: Business Continuity & Recovery Resource Center to read more.