In response to the impact of COVID-19 Congress placed into law the Coronavirus Aid, Relief and Economic Security Act or the “CARES Act”. What does this 883-page law mean for retirement plans and their participants? The CARES Act includes provisions that expand the availability of retirement funds to those who have been impacted by COVID-19.
Hardship withdrawals are typically given to participants who show they are in “immediate and heavy financial need” and are normally subject to a 10% early withdrawal penalty. Under the CARES Act the 10% penalty for early withdrawal on distributions up to $100k is waived, if it is for a coronavirus related distribution (a “CRD”). Usually hardship distributions are included as taxable income in the year that they receive the distribution, however, CARES act has changed that so a CRD hardship distribution will be included as taxable income ratable over the next three years, unless the participant elects to have the distribution included in taxable income sooner. Also, it is important to note that participants can repay all or a portion of the distribution for a period of up to three years from the day they receive the distribution to avoid taxation. In order for a participant to take advantage of these beneficial rules, the participant will have to self-certify that they have contracted COVID-19, that their spouse or dependent has contracted COVID-19, or that they have lost a job or have otherwise suffered a heavy financial burden due to the COVID-19 pandemic.
The maximum amount of loans that a participant can take out has doubled. Previously, participants were limited to the lessor of (1) $50,000 or (2) 50% of the vested account balance. Now participants are limited to the lessor of (1) $100,000 or (2) 100% of their total vested account balance. Also, a participant that qualifies under a CRD who has an outstanding loan with a due date between now and the end of 2020 can extend the repayment period by one year.
Required Minimum Distributions
Required minimum distributions have been waived for all 2020 distributions that would normally be required. This also applies to any participant that turned 70½ in 2019 that has not yet received their required distribution.
The CARES Act changes allow more flexibility for plan sponsors to amend their plans to suite various circumstances. In order to take advantage of these changes, plan sponsors will need to amend their current retirement plan to adopt the changes permitted by the CARES Act. There is a special amendment period for the changes allowed under the new law. If a plan sponsor wishes to take advantage of these benefits, they just need to amend the plan by the last day of the plan year beginning on or after January 1, 2022. This means that for a calendar year plan, they would have to amend their plan no later than December 31, 2022. If a plan has a fiscal year beginning July 1, 2022 then the plan would need to be amended no later than June 30, 2023. Plan sponsors should consider the impact these changes will have on their participants and their plans. Plan sponsors should also reach out to their administrators and advisers to increase their understanding and the impact of these changes.