UNDERSTANDING THE CARES ACT
ON FRIDAY, MARCH 27, 2020, THE CORONAVIRUS AID, RELIEF, AND ECONOMIC SECURITY ACT (CARES ACT), A MASSIVE RELIEF BILL FOR THOSE SUFFERING AS A RESULT OF THE CORONAVIRUS PANDEMIC, WAS SIGNED INTO LAW. Besides the generalized financial relief afforded to individuals, as well as loans and other concessions for businesses, the bill includes the following provisions to help participants and employer sponsors of retirement plans.
- The participant has been diagnosed with COVID-19 (as confirmed by a CDC- approved test);
- The participant’s spouse or dependent has been iagnosed with COVID-19; or
- The participant has suffered financially from the pandemic because:
- The participant was laid off, furloughed, quarantined, or has had hours reduced;
- he participant cannot work due to the lack of childcare because of the pandemic;
- The participant’s own business has had to close or reduce hours
The Act permits the Plan Administrator to rely on the participant’s self-certification that he/she qualifies for the distribution. Distributions would also be available for beneficiaries of deceased participants and for alternate payees.
While the distribution is exempt from the 10% penalty tax, it is still subject to ordinary income tax. Affected participants may spread the taxes over a three-year period and may repay all or part of the distribution to the plan or any plan that can accept rollovers within the three-year period. Such repayment is treated as a tax-free rollover of the funds to the plan. Following procedures developed in connection with very similar relief for major hurricanes, participants who repay distributions can file an amended return to recover any tax paid on the distribution reported in earlier years.
The bill permits any “eligible retirement plan,” including qualified plans, IRAs, 403(b) plans, and governmental 457(b) plans, to make a coronavirus-related distribution. The bill makes it clear that the provisions in Code sections 401(k), 403(b), and 457(b) that limit distributions will not be violated by coronavirus- related payments but provides no such relief for defined benefit or money purchase plans (which cannot make in-service distributions prior to age 59 1⁄2).
The coronavirus-related distributions are not eligible rollover distributions meaning that they are not subject to the 20% mandatory withholding typically applied to such distributions. The rules provide for 10% withholding that can be waived by the participant. Keep in mind that taxes will ultimately be due within the three-year window unless the distribution is repaid as permitted in the law. Participants must receive a notice that they can waive the withholding. Failure to provide that notice after the SECURE Act is subject to a $100 penalty per participant, up to a maximum of $50,000.
LOAN LIMIT INCREASES AND DELAYS IN REPAYMENT
The CARES Act modified the rules pertaining to participant loans by allowing loans up to 100% of a qualified individual’s vested account or benefit, up to $100,000 (previously limited to 50% and $50,000, respectively). This provision covers loans made until September 23, 2020. In addition, any loan payment due on any outstanding loan between March 27, 2020 and December 31, 2020, is delayed up to one year. The five-year repayment period is also extended for one year. Interest accrues on the loan during the delay period. All service providers and plan sponsors should be vigilant to ensure that participant loans are not reported on Form 1099R as in default during this extended repayment period.
“Because of the uncertainty about how
repayment of coronavirus-related distributions will be handled, and the tax impact of such repayment, it may be advisable for participants to take loans first.”
— Ferenczy Benefits Law Center
REQUIRED MINIMUM DISTRIBUTION REQUIREMENTS FOR 2020
Just a few months ago, the SECURE Act changed the age at which required minimum distributions (RMDs) began from age 70 1⁄2 to age 72 for distributions required to be made after 12/31/2019. The CARES Act effectively does away with RMDs due in 2020 from defined contribution qualified plans, 403(b) plans, IRAs, and governmental 457(b) plans. This guidance should prevent affected participants from having to liquidate deflated investments during this period, permitting them time to recover value. The 2021 distributions will be based on account values at December 31, 2020. It follows that if the market is not fully recovered, RMDs at that time should be lower.
SINGLE EMPLOYER DB FUNDING DELAY
The due date for any required contributions to defined benefit plans (including quarterly contributions) during 2020 is extended to January 1, 2021. The minimum amount is increased by the plan’s rate of interest for the interim period. Furthermore, the plan sponsor is permitted to consider the AFTAP for 2020 to be the same as it was for the last plan year ending before 2020.
DOL AUTHORITY TO POSTPONE DEADLINES
The CARES Act gives the Department of Labor authority under ERISA to delay deadlines due to public health emergencies. This will hopefully give rise to some extensions of Form 5500 filing deadlines.
REMEDIAL AMENDMENT PERIOD EXTENDED TO 2022
Plans that utilize the provisions offered under the CARES Act do not have to be amended until the end of the 2022 plan year (or such later date as the Secretary of the Treasury provides).
Governmental plans will have until the end of the 2024 plan year. The amendment must be retroactively effective and detail the plan’s operations in the interim. So, if amendments are not adopted immediately, it is important that good records are kept regarding the plan’s changed operations until written amendments are completed.
- The plan provided a notice containing the “maybe not” language at least 30 days prior to the beginning of the plan year advising participants that the safe harbor contribution might be suspending during the year; or
- The plan sponsor is operating at an economic loss for the plan IRAs, and governmental 457(b) plans. This guidance should year.
The regulations to section 401(k) were changed last year to permit safe harbor hardship distributions if there is a declared FEMA emergency that permits individual assistance. A review of the FEMA website indicates that not all states have been provided with the “individual assistance” eligibility. If your state has been given this individual assistance, then the plan can permit this type of hardship distribution. Normally, this would be part of the hardship amendment most document sponsors are providing. If there is not an individual assistance declaration, hardship distributions can still be made to 401(k) and 403(b) participants under the non-safe harbor rules and plans can be amended before the last day of the plan year to use those rules.
PARTIAL PLAN TERMINATION RULES
As a result of the lay-offs and temporary business closings associated with the pandemic, some plan sponsors may be subject to partial plan termination rules. A partial plan termination generally is deemed by the IRS to occur when 20% of total plan participants are terminated for reasons other than routine annual turnover. For example, a large fast food operation may experience annual turnover of 30% historically. This would not necessarily trigger a partial plan termination. However, if more than 20% of total plan participants are terminated due to the current state of emergency caused by the coronavirus, that presumably would trigger a partial plan termination. If a partial plan termination is deemed to have occurred, the plan must provide accelerated 100% vesting to the affected plan participants – that is, those who terminate employment.
Plan sponsors might ask about the status of the partial termination if the employer rehires the workers. The 20% test creates a presumption that a partial termination has taken place, but facts and circumstances can be used to show that a partial termination, in fact, has not occurred.
There is a great deal of information to digest from the CARES Act and there will surely be clarification and possible additional changes as Congress continues to find ways to help employers and stimulate the economy. We are available to help and answer questions so please feel free to contact us.