The lockdowns in response to the Coronavirus will likely have a strong negative impact on a large number of businesses and employees across the United States. Many employees may be facing economic hardship as a result of school closures or the loss of income of a spouse or partner. The Coronavirus Aid, Relief, and Economic Security Act (CARES) contains numerous provisions to help employee participants of qualified retirement plans. These provisions are optional for plan sponsors and they may adopt whichever provisions they choose.¹

Penalty-Free Distributions in 2020

Under the CARES act a plan sponsor has the option to allow certain eligible participants to take penalty-free distributions up to $100,000 at any time during the calendar year 2020 from their qualified defined contribution retirement plan account. ² These distributions have some unique characteristics compared with traditional distributions from retirement plans:

1. They are free from the 10% early distribution penalty that was in effect before the CARES act became law (however, they are still subject to income tax on the distribution but that tax may be spread over three years, see below).
2. They are not subject to the mandatory 20% tax withholding that often apply to distributions. ³
3. They can be made from a 401(k), 403(b), IRA, or other qualified defined contribution plan. ⁴

Distributions under this provision are called a “Coronavirus-related distribution” and are subject to the following restrictions and definition of a “qualified individual”: ⁵

1. The plan participant is diagnosed with COVID-19 by a CDC-approved test; or
2. The spouse or dependent of the plan participant is diagnosed with COVID-19 by a CDC-approved test; or
3. The plan participant “experiences adverse financial consequences” as a result of being quarantined, being furloughed, or being laid off, or having work hours reduced due to COVID-19; or
4. The plan participant is unable to work due to COVID-19 child care issues; or
5. The plan participant has closed or reduced hours in a business owned and operated by the plan participant; or
6. The plan participant has experienced other factors as determined by the Secretary of the Treasury.

The plan sponsor does not need to verity that these conditions are present – they may rely on the participant’s certification that they qualify under one or more of these factors. ⁶ These distributions (except for distributions from 457 plans) may be re-contributed to the retirement plan, or to another retirement plan, within three years from the date of distribution without regard to the contribution limits of the plan. If the participant does not re-contribute the COVID-19 distribution within that timeframe the taxes due on the distribution may be spread over a three year period. ⁷

Loans From a Qualified Retirement Plan

If a plan document already allows loans the plan sponsor can choose to increase the maximum loan limit from $50,000 to $100,000 to qualified individuals (see above for definition of qualified individual). In addition, the cap of 50% of the current value of the account is increased to 100%. These loan limits and caps can be increased for 180 period between March 27, 2020 and September 27, 2020. ⁸

The due date for repayment of such a plan loan through December 31, 2020 can be delayed for up to one year. Later repayments for such loans are also adjusted as appropriate to reflect the prior delayed due date plus any interest accruing during the delay. ⁹

Required Minimum Distributions Waived for 2020

For 2020 only, required minimum distributions (RMD) that would have been required to be paid out from qualified defined contribution plans need not be made. This waiver of RMD applies to the following types of plans: ¹⁰

• 401(k) plans
• 403(a) and 403(b) plans
• Individual Retirement Accounts (IRAs)
• Governmental 457(b) plans
• Qualified 401(k) plans such as profit-sharing and money purchase pension plans

If an RMD payment has already been made in 2020 that would have qualified for a waiver, and it is still within a 60-day period from the date of the RMD, that payment an be rolled back into a qualified plan or IRA to avoid taxation in 2020. ¹¹

Deferred Defined Benefit Plan Funding

Single-employer Defined Benefit Plan funding requirements for 2020, including quarterly contributions, may be deferred until January 1, 2021. The deferred funding must be paid with interest for the deferral period.

Plan Amendments For Adopting CARES Provisions

At the plan sponsor’s discretion, the plan may be amended to provide these expanded COVID-19 distributions and loans. However, it is not required. The plan may adopt these provisions now and has until the last day of the plan year beginning on or after January 1, 2022 to amend the plan.

Action Items for Employers and Plan Sponsors

If a plan sponsor would like to take advantage of any of the provisions of the CARES act to help plan participants and employees who are experiencing financial hardship because of COVID-19 we recommend the following action items:

1. Carefully review the terms of your retirement plan and discuss the procedures of your administrator to determine if any changes need to be made. This could involve a conversation with your record-keeper and/or third-party administrator.
2. If you intend to offer COVID-19 distributions then ensure your administrator can process a new distribution event that is not subject to a 10% penalty. If you have multiple retirement plans for employees create a procedure to ensure the total distributions do not exceed $100,000
3. If COVID-19 distributions are being repaid to your retirement plan put procedures in place to treat these contributions as rollover contributions and limit the amount of contributions to the aggregate amount of distributions that the individual received from all retirement plans in your group of plans.
4. If you intend to begin offering loans or increase the amount of loans in 2020, procedures should be in place to allow for new option of loans or the increase in the loan amount.
5. Any delayed loan payments should be properly documented to ensure such loans are not classified as being in default
6. Loan amortization and schedules should be updated to address loan changes
7. Communicate to plan participants to let them know of the new plan options and steps they can take to take advantage of them.

The changes in the CARES act allow employers and plan sponsors to provide additional options for employees who are negatively impacted by COVID-19. In addition, Plan Sponsors should evaluate the current plan’s administrative costs to evaluate opportunities for savings. Plan sponsors can contact Summit Hill Wealth Management at info@scwealthplanning.com for a full review of your current plan costs and opportunities for savings.