In addition to the loan and stimulus programs available to businesses, the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act includes a number of provisions that should provide assistance to plan sponsors as they deal with the COVID-19 outbreak.
The Act provides special rules for the following individuals impacted by the pandemic:
- Individuals diagnosed with COVID-19 by a CDC-approved test or whose spouse or dependent was so diagnosed, or
- Individuals who experience adverse financial consequences as a result of:
- Being quarantined, furloughed, or laid off due to the virus;
- Being unable to work because of a lack of child care due to the virus;
- The closing or reduction of hours of a business owned by the individual due to the virus;
- Other factors determined by the Secretary of the Treasury.
For those impacted, the rules have been changed to provide:
Waiver of the 10 percent early distribution penalty
This penalty typically applies to withdrawals prior to age 59 ½. Individuals will be able to receive penalty-free distributions of up to $100,000 from employer retirement plans and IRAs during 2020. The individual may elect to include the amount of the distribution in gross income ratably over three years, rather than entirely in the year of distribution. Alternatively, the individual can repay the amount of the distribution to the plan or IRA at any time within three years.
COVID-19 distributions are not considered hardship distributions. Rather, they are considered their own new category of distribution for retirement plan purposes, and none of a plan’s hardship restrictions apply. A plan can allow for this type of distribution even if it does not permit hardship distributions.
Waiver of required minimum distributions (RMDs) for 2020
The CARES Act waives any required minimum distributions from retirement plans and IRAs for calendar year 2020. This includes required distributions to beneficiaries of deceased participants or account holders. A participant who has already taken his or her 2020 distribution will generally need to include it in gross income and pay the related taxes with the 2020 tax return. However, a participant has the ability, within 60 days of the distribution, to return the distribution to an IRA or deposit it into another qualified retirement account without owing taxes on it. Another option is to convert the amount into a Roth IRA.
Increase in loan limits and delay existing loan repayments
Plan sponsors have the option to double the current retirement plan loan limits to the lesser of $100,000 or 100 percent of the participant’s vested account balance in the plan. Plan sponsors can also elect to keep existing loan limits in place.
Loan repayment due dates, from the date of enactment of the Act through December 31, 2020, are extended by one year, with the term of the loan being extended by one year as well. Participants may still elect to pay their loans on time, but they will not be penalized if they are up to one year late for each payment due during this period.
Single-employer defined benefit pension plan funding relief
Any minimum contribution to a single-employer defined benefit plan that was due in 2020 can be delayed until January 1, 2021. On January 1, 2021, contributions for 2020 are due with interest for the period from the original due date to the payment date.
Expansion of Department of Labor (DOL) authority to postpone deadlines
The CARES Act provides the DOL with additional authority to postpone certain deadlines under ERISA. While the Act gives the DOL the ability to postpone the Form 5500 filing deadline (which is July 31, 2020 for calendar year plans, unless extended to October 15 by the plan sponsor), the DOL has not done so yet.
The CARES Act provides for the immediate adoption of these provisions, even if the plan does not currently allow for in-service distributions or loans, provided that the plan is amended on or before the last day of the first plan year beginning on or after January 1, 2022. In other words, plan sponsors can make changes now and amend their plans later.
We fully expect the Internal Revenue Service and the DOL to provide additional guidance on the Act’s impact on retirement plans in the coming months, and we will continue to update you as more information emerges as part of our CARES Act accounting coverage and guidance.
We are also regularly updating our COVID-19 Resource Center, which you can access here. If you have any questions about these or any other matters, please do not hesitate to contact your Kreischer Miller professional or any member of our team.
Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.