Implications for Retirement Plans Under the CARES Act
- The $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act) includes significant expansions in small business lending, unemployment insurance, tax relief to individuals and employers, healthcare measures, economic stabilization funds, and other emergency appropriations and measures aimed at combating the COVID-19 healthcare and economic crisis.
- Importantly, the CARES Act also includes changes to both defined contribution and defined benefit retirement plans, as well as other changes affecting America's retirement vehicles.
- This Holland & Knight alert is a general outline of provisions in the CARES Act impacting retirement plans and their administration, and is not an analysis of any particular retirement plan.
Congress has completed three rounds of legislation in response to the COVID-19 pandemic and resulting economic crisis. The first round, which included an $8.3 billion supplemental appropriation, was signed into law on March 6, 2020. The second round, the Families First Coronavirus Response Act, was signed into law on March 18.
The third round, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), was signed into law on March 27. A $2.2 trillion package, the CARES Act includes significant expansions in small business lending, unemployment insurance, tax relief to individuals and employers, healthcare measures, $500 billion in economic stabilization funds, $274 billion in emergency appropriations, and other measures aimed at combating the COVID-19 healthcare and economic crisis. The CARES Act includes changes to both defined contribution and defined benefit retirement plans, as well as a few other changes affecting America's retirement vehicles.
The following is a general outline of provisions in the CARES Act impacting retirement plans and their administration, and is not an analysis of any particular retirement plan. As such, it should not be relied upon as legal advice regarding how any specific company or individual would respond in a specific situation.
Defined Benefit Plans
- Extends the due date of required minimum contributions (RMCs) that would otherwise be due during the 2020 calendar year, including quarterly contributions not yet paid; RMCs for 2020 are now due Jan. 1, 2021, and are subject to increase by interest (at the plan's effective rate of interest for the plan year) accruing for the period between the original due date and the payment date.
- Allows for a plan sponsor to elect to treat the plan's adjusted funding target attainment percentage for the last plan year ending before Jan. 1, 2020, as the adjusted funding target attainment percentage for the plan year that begins in calendar year 2020.
- Extends the special cooperative and small-employer charity pension plan rules to plans sponsored by an employer that, among meeting other requirements, conducts medical research and for which the primary exempt purpose is to provide services with respect to mothers and children.
Defined Contribution Plans
The CARES Act includes early withdrawal and loan changes that can be helpful for participants affected by the crisis who need access to cash.
Participants eligible for the relief include the following:
- participants who have been diagnosed, or who have a spouse or dependent (as defined in Section 152 of the IRS Code) who has been diagnosed, by a test approved by the Centers for Disease Control and Prevention (CDC), with the virus (i.e., SARS-CoV-2 or COVID-19)
- participants experiencing adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury
Early Withdrawals for Coronavirus-Related Distributions
- Temporarily waives the withholding requirements and the existing 10 percent penalty for early withdrawals (generally applicable to participants under age 59½) for "coronavirus-related distributions," from qualified retirement plans up to $100,000.
- Allows qualified participants to repay the withdrawal to an eligible retirement plan or pay income tax ratably over three years.
- Coronavirus-related distribution
- $100,000 limit is per individual, not plan
- Repayment of distribution or income tax payments over three years
- Eligible retirement plans
- a distribution from an eligible retirement plan or individual retirement account (IRA) made on or after Jan. 1, 2020, and before Dec. 31, 2020, to an eligible participant
- the administrator of an eligible retirement plan may rely on an employee's certification that the employee satisfies the conditions of a coronavirus-related distribution in determining whether any distribution is a coronavirus-related distribution
- companies with more than one plan from which an individual could receive distributions must monitor all plans within the controlled group to ensure the $100,000 limit is not exceeded by an individual
- Amounts distributed may be repaid: An individual may repay the distribution to an eligible retirement plan or pay income tax over a three-year period beginning on the day after the date the distribution was received.
- Income taxes: An individual may pay income tax due on the distribution ratably over a three-taxable-year period beginning with the taxable year of the distribution.
- No early distribution tax: Such distributions will not be subject to the 10 percent early distribution tax.
- all employer plans qualified under Section 401(a) of the Code, such as 401(k) plans, profit-sharing plans and employee stock ownership plans (ESOPs)
- 403(b) plans
- 457 plans
- IRAs described in Section 408(a) or Section 408(b) of the Code
Increase in Loan Availability
- Temporarily increases loan amounts that can be taken by a qualified participant from a qualified employer plan. A qualified participant may take a loan during the 180-day period beginning on the enactment of the CARES Act (March 27, 2020), in an amount up to the lessor of $100,000 or 100 percent of the participant's vested account balance. (The current limit is the lesser of $50,000 or 50 percent of the vested account balance.)
Loan Repayment Relief for Current Loans
- Repayment of currently unpaid loans is delayed for one year for all payments originally required during the period beginning on March 27, 2020, and ending on Dec. 31, 2020.
- Subsequent repayments must be adjusted to reflect the delay and interest accruing during such delay.
- The period of suspended repayment extends the five-year loan period.
2020 Waiver of RMDs
- Temporarily waives required minimum distributions (RMDs) under Section 401(a)(9) of the Code that are required to be made in calendar year 2020.
- Applies to qualified defined contribution plans, 403(b) plans, 457(b) plans and IRAs.
- Applies to distributions required to be made in 2020, because either 2020 is the required beginning date or the distribution was not made before 2020.
Changes can be implemented and become effective immediately, but will not need to be adopted as an amendment to the applicable plan document until on or before the last day of the first plan year that begins on or after Jan. 1, 2022. Governmental plans have an additional two years to adopt amendments.
Expanded DOL Authority to Postpone Certain Deadlines
Provides the U.S. Department of Labor (DOL) the ability to postpone certain Employee Retirement Income Security Act of 1974 (ERISA) filing deadlines for a period of up to one year in the case of a public health emergency.
We Can Help
If you have any questions regarding your retirement plans and the potential impact of the new legislation on them, please contact the authors or another member of Holland & Knight's Employee Benefits and Executive Compensation Group, including Partners Ari Alvarez, Kelly Bley, Gregory Brown, Christopher Buch, Kerry Halpern, John Martini, David Pardys and Rachel Shim.
DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the author of this alert for timely advice.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.