Congress has passed significant legislation in response to the COVID-19 emergency. The Families First Coronavirus Response Act (FFCRA) was enacted on March 18, 2020, and on March 27, 2020, the President signed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). While most of the CARES Act concerns funding various relief programs and distributing money to citizens to help them with their finances during this crisis, employers should take note of the following provisions that apply to retirement plans:
Special Rules for Use of Retirement Plan Funds
Coronavirus-Related Withdrawals. The CARES Act allows distributions for coronavirus‑related reasons through December 31, 2020, for up to $100,000 from 401(k) plans, 403(a) plans, 403(b) plans, government‑sponsored 457(b) plans, and IRAs. These distributions are not subject to the 10% early distribution penalty applicable to distributions made before age 59 ½, and may be repaid, in one or more contributions, within three years. In addition, income taxes may be paid ratably over three years.
A coronavirus‑related distribution only may be made to a “Qualified Individual.” A Qualified Individual is an individual:
- Who is diagnosed with COVID-19;
- Whose spouse or dependent is diagnosed with COVID‑19;
- Who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care, closing or reduced hours of a business owned and operated by the individual; or
- Other factors determined by the Secretary of the Treasury.
The plan administrator may rely on an employee’s certification that the employee is a Qualified Individual in determining whether any distribution is a coronavirus-related distribution.
Implications for Employers. Employers should contact their plan recordkeeper as soon as possible if they wish to implement these coronavirus-related distributions, including preparation and distribution of participant communications. Some recordkeepers are already reaching out to their clients. Both of these changes appear to be optional, and it looks like employers may add the coronavirus-related distributions without also allowing repayments.
Coronavirus-Related Loans from Qualified Plans. The CARES Act temporarily increases the maximum loan limit and temporarily extends the repayment period for plan loans made to Qualified Individuals. The maximum permissible loan is temporarily increased until September 23, 2020, to the lesser of:
- $100,000 (versus the current $50,000) reduced by the amount of any outstanding loan; or
- The participant’s account balance (versus the current 50% of the participant’s account balance).
Loan repayments due from Qualified Individuals between March 27, 2020, and December 31, 2020, are delayed for one year, even if such delay results in a loan repayment after the end of the statutory maximum five‑year loan repayment period. The existing loan repayment schedule must be adjusted to reflect the delay and interest continues to accrue. There is not consensus on how and when loan repayments should resume. The most common interpretation, and the one being implemented by most recordkeepers, is based on the IRS safe-harbor guidance issued in 2005 for Hurricane Katrina relief. Under this interpretation, repayments begin on January 1, 2021, the loan is re-amortized as of that date, and the term of the loan is extended nine months.
Implications for Employers. Again, employers will need to work with their plan recordkeeper to get these temporary loan provisions implemented, including preparation and distribution of participant communications. Loan procedures may also need to be updated. Some recordkeepers have already begun contacting their clients. While the increased maximum loan limit appears to be optional, it is not clear whether the loan payment delay is required. The statutory language seems to indicate the delay is required. But, the IRS safe-harbor guidance for Hurricane Katrina relief interpreted similar statutory language as optional.
Waiver of Required Minimum Distributions for 2020. Under the CARES Act, the required minimum distribution (“RMD”) requirements for calendar year 2020 are waived for 401(k) plans, 403(a) plans, 403(b) plans, government‑sponsored 457(b) plans, and IRAs. The temporary CARES Act waiver applies to anyone with an RMD due in 2020, including those who turned age 70 ½ in 2019 with a required beginning date of April 1, 2020.
Implications for Employers. Even though the RMD requirements are waived for 2020, a participant still may elect to take a distribution under the plan’s RMD provisions, but the distribution is not a RMD because no distributions made in 2020 are RMDs. If a participant elects to take a distribution during 2020, the portion of the distribution that otherwise would have been a RMD is not an eligible rollover distribution, so the individual cannot rollover such portion of the distribution into an IRA or other qualified plan, and the Code Section 402(f) special tax notice does not need to be provided unless the distribution exceeds the amount that otherwise would have been a RMD. The waiver of the RMD rules for 2020 appears to be required.
Additionally, it is important to recognize that the CARES Act RMD waiver for 2020 does not affect the effective date of the SECURE Act change in the age at which RMDs must begin (age increased from 70 ½ to age 72 for individuals who had not reached age 70 ½ by December 31, 2019).
Plan Amendments. Generally, plan amendments for implemented changes are not needed until the last day of the first plan year beginning on or after January 1, 2022 (the deadline for calendar year plans is December 31, 2022). Government plans will have until the last day of the first plan year beginning on or after January 1, 2024, to be amended. The CARES Act further provides that any amendment adopted to implement RMD waivers for 2020 will not be a prohibited cutback in violation of the Code’s anti-cut back rules.
Implications for Employers. Employers have plenty of time to adopt amendments reflecting the retirement plan changes made by the CARES Act, but the plan must be operated as in accordance with the implemented changes in the meantime. We have specified which provisions we think are optional and which we think are required. Until the IRS gives some clarity on this, however, employers will need to coordinate with their recordkeeper and make good faith decisions.
Single-Employer Defined Benefit Plan Funding Rules
Payment Delay. The CARES Act delays payment of any defined benefit plan minimum required contributions otherwise due (including quarterly contributions) during calendar year 2020 to January 1, 2021. The amount of each such minimum required contribution must be increased, however, for any interest accruing from the original due date for the contribution through the payment date, at the effective rate of interest for the plan and for the plan year that includes the payment date.
Implications for Employers. This delay in the defined benefit plan minimum funding requirements should assist those employers facing cash flow issues caused by the COVID‑19 crisis. This temporary delay is optional, however.
Benefit Restriction Status. A plan sponsor may elect to treat the plan’s adjusted funding target attainment percentage (AFTAP) for the last plan year ending before January 1, 2020, as the AFTAP for plan years that include calendar year 2020.
Implications for Employers. This relief may prevent a defined benefit plan from becoming subject to funding-based benefit restrictions. Under those restrictions, if a plan’s AFTAP falls below 80%, certain restrictions apply, such as the ability to make lump sum payments.
For Warner’s summary of the CARES Act, please click here.
Warner is here to help! If you need assistance with implementing the CARES Act provisions, please contact a member of Warner’s Employee Benefits and Executive Compensation Practice Group.