The Coronavirus Aid, Relief and Economic Security Act, or CARES Act, contains important changes to retirement plan vehicles, including changes to defined contribution and defined benefit retirement plans. Americans can expect the following changes to retirement plans.
Early Withdrawals Waived for Coronavirus-Related Distributions
- Under Section 2202 of the CARES Act, the 10% early withdrawal penalty is waived for coronavirus-related distributions, up to $100,000 (per individual, not plan). Normally, there is a 10% early withdrawal penalty for qualified plan distributions made before the participant or beneficiary turns 59 1/2.
- Participants are allowed to repay the withdrawal to the plan or another qualified retirement plan or IRA as a rollover.
- Participants who don’t repay the withdrawal amount will have the distribution taxed ratably over three years after the year of distribution or pay income tax ratable over a three year period.
The CARES Act identifies a “coronavirus-related distribution” as the following:
- a distribution from an eligible retirement plan or Individual Retirement Account (IRA) made on or after January 1, 2020, and before December 31, 2020.
- a distribution to an individual who meets the following criteria:
- is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention
- has a spouse or dependent who is diagnosed with COVID-19
- experiences significant financial consequences due to COVID-19 that results in scenarios such as being quarantined, furloughed or laid off, receiving a reduction in work hours, or closing your business
The administrator of the retirement plan can use the employee’s certification that the employee satisfies the conditions of needing a coronavirus-related distribution.
Temporary Increase in Plan Loan Limits
Generally, a loan from a qualified plan cannot exceed the lesser of $50,000 or 50% of the participant’s vested account balance. Under the CARES Act, a qualified individual may take a loan up to the lesser of $100,000 or 100% of the participant’s vested account balance, beginning on March 27, 2020, through a 180-day period. Qualified individuals are the same individuals listed above who are eligible for the 10% penalty waiver. If a plan loan is outstanding on or after March 27, 2020 through December 31, 2020, the due date is extended for one year. Subsequent payments will reflect the delay in the due date and any interest accrued during that time.
Waiver of Required Minimum Distributions for 2020
Required minimum distributions (RMDs) for the 2020 calendar year are waived for defined contribution plans including 401(k), 403(b) and 457(b) plans. Amounts withdrawn in 2020 that, without this waiver would not have been eligible to rollover, can be rolled over into the next year. The waiver applies to:
- 2019 RMDs (qualified individuals could have delayed payment until April 1, 2020)
- 2020 RMDs
CARES Act Retirement Changes: Looking Ahead
Plan sponsors are to adopt plan amendments by December 31, 2022 for plans that are on a typical calendar plan year (January 1 – December 31). For plans that are on a different calendar, plan sponsors have until the last day of the plan year that begins in 2022 to complete plan amendments. Government plans are not required to complete any amendments until the last day of the first plan year beginning on or after January 1, 2024. If the Secretary of the Treasury extends any deadlines, we will let you know.