Provisions allowing plan sponsors to give participants greater access to their retirement plan funds

For distributions related to the coronavirus (COVID-19) of up to $100,000 per year from qualified retirement plans, the CARES Act provides tax relief by:

• Waiving the otherwise applicable 10 percent early withdrawal penalty
• Allowing the income tax due on such distributions to be spread over three years
• Permitting repayment of the distributed amount within three years as an eligible rollover distribution to an IRA or plan

The CARES Act also eliminates the restrictions on in-service coronavirus distributions from 401(k), 403(b) and governmental 457(b) plans.

While the Act does not override the in-service distribution restrictions on money purchase and defined benefit plans, the tax relief noted above applies to coronavirus distributions otherwise permissible under such plans.

Generally, a coronavirus-related distribution is a one made on or after January 1, 2020, and before December 31, 2020, to a participant who has tested positive for COVID-19, or whose spouse or beneficiary has tested positive for COVID-19, or who experiences one or more of a wide range of adverse financial consequences including being quarantined, furloughed or laid-off, having work hours reduced, or being unable to work due to lack of child care as a result of the COVID-19 pandemic.

Under the CARES Act, for participants who are eligible for coronavirus-related distributions and who take out loans within 180 days beginning March 27, 2020, the loan maximums increase to the lesser of $100,000 or 100 percent of the nonforfeitable accrued benefit (up from the lesser of $50,000 or 50 percent of the participant’s nonforfeitable accrued benefit).

In addition, such participants with outstanding loans on or after March 27, 2020, will not have to make loan repayments for an additional year if the repayment due date is between March 27, 2020 and December 31, 2020.

Elimination of required minimum distributions

The CARES Act eliminates required minimum distributions in 2020 for participants in all DC plans, including profit sharing, money purchase, 401(k), 403(b) and governmental 457(b) plans.

It also eliminates the required minimum distribution for individuals who turned age 70½ in 2019 and who would otherwise have had to take the 2019 required beginning distribution by April 1, 2020.

This section of the CARES Act is retroactively effective as of January 1, 2020.

Additional time for most plan amendments related to these retirement plan provisions

Plan amendments related to the distribution and loan relief as well as the waiver of 2020 calendar-year required minimum distributions are not required until the last day of the first plan year beginning on or after January 1, 2022, with governmental plans having until the 2024 plan year.

In both cases, the plan must operationally comply with the terms of the amendment prior to the adoption date.

However, there is no additional time for collectively bargained plans to make amendments.

Temporary funding relief for single-employer DB plans

Sponsors of most single-employer DB plans can delay payment of any required contributions, including quarterly installments that are due in the 2020 calendar year, until January 1, 2021.

The amount due at that time will include interest for the deferred payment. While this relief extends contribution deadlines for minimum funding purposes, it does not extend the deadline for tax deduction purposes, absent further legislative or regulatory action.

This funding relief is not available to Cooperative and Small Employer Charity (CSEC) plans.

For benefit restrictions applicable to single-employer DB plans, plan sponsors may elect to use the adjusted funding target attainment percentage (AFTAP) for the last plan year ending before January 1, 2020 as the AFTAP for plan years that include calendar year 2020.

Immediate action items for plan sponsors to consider

Determine whether you want your plan to offer coronavirus-related distributions. If so, address the administrative issues internally and with affected service providers.

Such issues include revised policies and procedures and development of participant request forms. Consider communicating the new processes to your participants.

At the same time, sponsors of 401(k) plans might also wish to consider expanding the types of money available for hardship distributions (e.g., qualified nonelective contributions, qualified matching contributions, and earnings on them and 401(k) elective contributions) as is now permitted.

Determine whether you want your plan to offer increased loan amounts and/or delayed loan repayments.

If so, address the internal and external administrative issues and communications as in the bullet above, but remember that the time period within which loans can be made under this provision is only 180 days.

There is virtually no time in which to make any changes with respect to the required beginning date distributions scheduled to go out by April 1, 2020.

However, because such distributions will no longer be “required minimum distributions” under the law, it appears that they generally will be eligible for rollover.

Sponsors of single-employer DB plans will need to determine how to address the minimum contribution relief. For example, determine whether, notwithstanding the relief, you prefer to make the 2020 minimum contributions this year.

Sponsors of single-employer DB plans will also need to determine whether to base benefit restrictions on the calculations for the prior year.

What’s next?

There continues to be discussion about another bill to be put forward later in the year (“Stimulus 4.0”), but whether that will happen remains uncertain.

* In addition to retirement plan-related matters, the Cares Act addresses many other issues including group health coverage, small business loans, direct payments to certain individuals, paid family leave, sick pay, and loans and loan guarantees to businesses adversely affected by the coronavirus.

The information on this webpage is preliminary and subject to revision after guidance is issued. On all issues involving the interpretation or application of laws and regulations, plan sponsors should discuss the issues raised here with their legal, tax and other advisors before determining how they apply to their specific situation.