The Coronavirus, Aid, Relief, and Economic Security (CARES) Act signed on March 27, 2020, contained several provisions related to eligible retirement plans. Some of the provisions are options such as the distribution and loan provisions while others are mandatory, namely the waiver of 2020 required minimum distributions.
Coronavirus Related Distributions
Under the CARES Act, eligible retirement plans can allow a qualified individual to withdraw up to $100,000 from their account. These distributions are exempt from the 10% early withdrawal penalty and income tax withholding at the time of distribution.
Individuals are able to pay tax on the income from the distribution ratably over three years. These loans can also be paid back within three years. The plan sponsor can rely on the participant’s certification that they are qualified.
The CARES Act defines a qualified individual as someone:
- 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 due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or
- Other factors as determined by the Treasury Secretary
Increased Loan Limits and Delayed Payments
The CARES Act allows the plan loan limit to be increased, for a qualified individual, to the lesser of $100,000 or 100% of a participant’s balance for 180 days after the Act was signed.
Plan loan payments from March 27, 2020 through December 31, 2020 can be delayed for up to one year subject to plan approval. Interest will continue to accrue on the loan and at the end of the deferment the loan will be reamortized and the term of the loan can be extended for up to one year.
Similar to the Coronavirus related distributions, the plan sponsor can rely on the participant’s certification that they are eligible.
Waiver of 2020 Required Minimum Distributions (RMDs)
The requirement for required minimum distributions has been waived for 2020. This waiver also includes initial RMDs for 2019 that were not completed during 2019. Individuals that have already received their 2020 RMD are eligible to rollover the distribution and defer paying taxes with a 60-day rollover.
Delayed Contribution Deadline for Defined Benefit and Money Purchase Plans
Contributions due to a defined benefit or money purchase plan in calendar year 2020 have a delayed due date to January 1, 2021. The employer must pay interest on the delayed payments from the original due date to the payment date.
If the qualified plan utilizes the distribution or loan provisions the plan must be amended no later than the end of the plan year beginning on or after January 1, 2022.
by Bethany Hulbert