New CARES Act: COVID-19 Relief Available for Retirement Plans
Since the Coronavirus Aid, Relief and Economic Security (CARES) Act became law, ABG Southwest is carefully reviewing the retirement relief remedies in the $2 trillion stimulus package. These provisions, supported by the American Retirement Association (ARA), include easing retirement plan withdrawal and loan rules to free up funds for individuals impacted by the pandemic and to provide relief from the required minimum distribution (RMD) rules. The bill also adds funding relief for single-employer defined benefit plans.
While this bulletin from ABG Southwest is not intended to be a comprehensive explanation of the Act’s retirement provisions, we are prepared to answer your questions and proactively guide you through its implications for both participants and sponsors. We will be reviewing new federal guidance and FAQs from the Department of Labor, IRS, and other agencies, and sharing further updates with you either directly or through our Insights section at abgsw.com or the COVID-19 Resource Hub on the REDW website..
Below are the key provisions affecting retirement plans that are the most impactful areas for our clients.
The CARES Act waives the 10% early withdrawal penalty tax on early withdrawals up to $100,000 from a retirement plan or IRA for 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 due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19
- Who is impacted by other factors as determined by the Treasury Secretary.
The legislation also permits those individuals to pay tax on the income from the distribution over a three-year period and allows individuals to repay that amount into the plan over the next three years. Those repayments would not be subject to the retirement plan contribution limits.
The CARES Act doubles the current retirement plan loan limits to the lesser of $100,000 or 100% of the participant’s vested account balance in the plan. Individuals with an outstanding loan from their plan with a repayment due from the date of enactment of the CARES Act through Dec. 31, 2020, can delay their loan repayment(s) for up to one year. Note these provisions apply only to individuals who meet the same requirements for Coronavirus-Related Distributions, above.
The legislation further permits retirement plans to adopt these rules immediately, provided the plan is amended on or before the last day of the first plan year beginning on or after January 1, 2022, or later if prescribed by the Treasury Secretary.
Temporary Waiver of Required Minimum Distribution Rules
The CARES Act waives RMDs for calendar year 2020 for defined contribution plans, including 401(k), 403(b), 457(b) and IRA plans, allowing individuals to keep funds in their retirement plans. Under current law, individuals generally at age 72 (70½ before 2020) must take an RMD from their defined contribution plans and IRAs. The legislation also includes special rules regarding the waiver period to, in essence, hold harmless those individuals (and plans) who took advantage of the RMD waiver for 2020.
Single-Employer Defined Benefit Plan Funding Rules
The law provides single-employer defined benefit plans funding relief by giving companies more time to meet their funding obligations and delaying the due date for any contribution otherwise due during 2020 until January 1, 2021. At that time, contributions due earlier would be due with interest. The provision also provides that a plan’s status for benefit restrictions as of December 31, 2019 will apply throughout 2020, such that a plan sponsor may elect to treat the plan’s adjusted funding target attainment percentage for the last plan year ending before January 1, 2020 as the adjusted funding target attainment percentage for plan years which include calendar year 2020.
Expansion of DOL Authority to Postpone Certain Deadlines
The legislation provides the Department of Labor with expanded authority to postpone certain deadlines and various filing requirements under ERISA. In general, the legislation increases the circumstances to go beyond a terroristic or military action to also include a public health emergency declared by the Secretary of Health and Human Services under the Public Health Service Act.
ARA‘s recommendations to the agencies include an automatic extension of the Form 5500 series for retirement plans, an extension to the deadline for correcting a failed ADP or ACP test, and an extension of the period for distributing excess contributions and excess aggregate contributions under a plan.
ARA Presses for Defined Contribution Funding Relief
Moving beyond the CARES Act, the ARA continues to push for additional assistance, including defined contribution funding relief. Most recently, the ARA called on the Treasury Department to provide relief to help employers facing significant financial burdens relating to the coronavirus, especially for retirement plans sponsored by small businesses. ”The financial crisis facing employers might force them to terminate their plans rather than keeping them intact, but partially frozen, until the business recovers,” the ARA warned in a formal letter.
We Welcome Your Questions
As always, we are standing by to support you and your employees in this unprecedented time. Please contact your ABG Southwest primary relationship manager for additional information or assistance with the implementation of these critical provisions.
Reprinted with permission of Alliance Benefit Group, LLC (ABG). ABG Southwest is member-owner of the ABG network, a national organization of retirement plan, health and welfare consulting and benefit administration firms.