The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) which was signed into law on March 27, 2020, provides dollar relief to those suffering as a result of the coronavirus. So, what should you know as a trustee/plan sponsor of your company’s retirement plan?
First, we need to understand who is eligible to receive financial relief under the CARES Act.
- A retirement plan participant diagnosed with either the SARS-CoV-2 or COVID-19 virus (as confirmed by a test approved by the Centers for Disease Control).
- Whose spouse or dependent has been diagnosed?
- Due to the pandemic, a participant who has suffered financial distress due to one of the following
- He or she was laid off, furloughed, quarantined, or had work hours reduced.
- He or she cannot work due to a lack of childcare.
- He or she has a business that closed or a reduction in work hours.
- The Secretary of the Treasury may designate other situations, but those have yet to be addressed.
The CARES Act allows the trustee/plan administrator to accept the participant’s self-certification regarding the above qualifications. We suggest keeping a written record of the participant’s self-certification.
If the 401(k), 403(b) or Governmental 457(b) plan is amended, a special coronavirus-related distribution can be provided for eligible plan participants.
- Distributions may be up to the lesser of the participant’s entire account or $100,000. (Note: this distribution is not allowed for profit-sharing plans such as defined benefit plans, cash balance plans, or money purchase pension plans. However, such plans may be amended to permit in-service distributions to participants at age 59½.)
- These distributions will not be subject to the 10% tax penalty applied prior to age 59½ to the extent it does not exceed $100,000. Ordinary income taxes still apply.
- Taxes due can may be spread out over three years.
- Tom decides to take a COVID related distribution of $30,000. If the distribution was not related to COVID, Tom would owe tax on the $30,000 in 2020, and would also owe an additional 10% tax ($3,000), because he is under the age of 59½. Under COVID qualification, Tom can claim $10,000 as income in 2020, $10,000 as income in 2021, and $10,000 as income in 2022. Spreading his taxes over three years (and maybe in a lower tax bracket than he would be if he had to claim the total amount in one year). Plus, he doesn’t have to pay the $3,000 additional 10% tax. Withdrawing funds from a 401(k) should be carefully evaluated. We’re here to answer participant questions and encourage you to have your participants call us.
- The distribution may be treated as a tax-free rollover and repaid within three years (without adjustments for earnings).
- Example: Tom pays taxes on $10,000 in 2020 and $10,000 in 2021. In 2022, he deposits $30,000 into his IRA, representing a repayment of the $30,000 distributed to him in the distribution in 2020. He will be able to recuperate the taxes paid on his 2020 and 2021 returns and will not need to claim the final one-third of the distribution as income in 2022.
Remember: Give participants a notice that they can waive the withholding, because failure to provide that notice after the SECURE Act is subject to a $100 penalty per participant, up to a maximum of $50,000.
The CARES Act modified the loan rules to permit new loans between March 27, 2020, and September 23, 2020, equal to the lesser of 100% of the vested balance or $100,000. These limits are reduced by existing loans. In addition, a plan sponsor is not required to modify its plan to permit coronavirus-related loans or to provide for the extended repayment period.
Under the new loan rules, an eligible participant may:
- Borrow the lesser of his full account or $100,000, up from the previous limit of $50,000.
- Have a suspension of loan payments for up to one year. Loan payments due after March 27, 2020, and before December 31, 2020, whether on a new COVID related loan or on an existing loan, are delayed for one year.
- Have the five-year maximum loan repayment period extended by one year. Interest accrues on the loan during the period delayed. It is a little unclear from the language of the law whether payment on loans must restart as of January 2021 or whether all payments after the suspension are delayed for a full year after they are due. Further guidance from the IRS is needed.
- The loan payment suspension does not cause a deemed distribution avoiding any taxes that would be due.
Reminder: Plan sponsors should review Form 1099Rs issued in 2021 to ensure a default has not occurred if the participant is still employed and has not incurred a distributable event, such as termination employment.
Required Minimum Distributions
The CARES Act eliminates Required Minimum Distributions (RMDs) for qualified plans in 2020. There is no waiver of the RMD requirement for defined benefit or cash balance plans. For those who still may need the income and are in a lower tax bracket this year, it may make sense to take the RMD or a lesser amount if desired. RMDs must begin again in 2021 and no later than December 31, 2021. This waiver applies to all plan participants.
If a participant already took his or her distribution in 2020, then he or she may roll over that amount back to the distributing plan, to another retirement plan, or to an IRA within 60 days of receipt.
Note, the RMD suspension in 2020 applies to inherited IRAs as well.
Angie Kaufman, Vice President