COVID-19 Benefit Plan Opportunities
The CARES Act includes retirement-based provisions which ease retirement plan hardship and loan regulations in order to make retirement funds available to individuals impacted by the pandemic. The final bill also provides relief from the required minimum distribution (RMD) rules, delays contributions to single-employer pension plans, and expands the U.S. Department of Labor’s (DOL) authority to postpone certain deadlines under ERISA.
Hardship Distributions1
The CARES Act creates a new coronavirus-related distribution option and waives the 10% early withdrawal penalty for one or more early withdrawals from a retirement plan or individual retirement accounts (IRAs) up to $100,000. A coronavirus-related distribution (CRD) is a distribution of funds from a plan, between January 1, 2020 and December 31, 2020, to a qualified individual:
- who is diagnosed with COVID-19;
- whose spouse or dependent (generally a qualifying child or relative who receives more than half of his or her support from you) 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; or
- other factors as determined by the Treasury Secretary.
A plan administrator may rely upon an employee’s certification in determining whether any distribution is a CRD. Instead of being subject to income tax upon receipt, taxation of these CRDs may be spread out ratably over a three-year period or the individual has the option to repay the amount tax-free back into the plan over the next three years. The three-year recontribution period for each CRD begins on the day after it is received. Those repayments would not be subject to the annual retirement plan contribution limitations under the Internal Revenue Code. If not repaid within the three-year window, participants will be taxed on the CRD amount that is not recontributed to the plan, but they don’t have to worry about owing the 10% early withdrawal penalty. There are no limitations on what individuals can use these funds for during the three-year period.
Loans from Qualified Plans1
The CARES Act expands the availability of loans from retirement plans to qualified individuals beginning on the effective date of the CARES Act and ending 180 days later. The legislation doubles the current limits on plan loans to the lesser of $100,000 or 100% of the participant’s vested account balance in the plan. The existing limitation that loans may not exceed half the participant’s vested account balance has been removed. In addition, the CARES Act delays loan repayment dates for one year. This extension applies for any loans outstanding on or after the date of enactment that had loan repayment dates through December 31, 2020. However, accrual of interest will continue during this period and subsequent repayments will be adjusted to reflect the extension, even beyond the 5-year loan term provision.
Plan Amendments1
Even if the plan does not currently allow for hardship distributions or loans, the legislation 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 (i.e., for calendar year plans, by December 31, 2022), or later if prescribed by the Treasury Secretary.
Temporary Waiver of Required Minimum Distribution2
For calendar year 2020, the required minimum distributions (RMDs) are suspended for defined contribution plans, including 401(k), 403(b), 457(b) plans and IRAs. This includes the first RMD, which individuals may have delayed from 2019 until April 1, 2020. This waiver allows individuals to keep funds in their retirement plans in an effort to recover from stock market losses. Without this waiver in 2020, participants likely would have withdrawn a greater percentage of their plan balance or IRA and paid a big tax bill on value that no longer exists.
Expansion of DOL Authority to Postpone Deadlines3
The legislation provides the DOL with increased authority to postpone certain deadlines under ERISA by up to one year. In general, the legislation expands the circumstances to go beyond a terroristic or military action or in the event of a federal disaster to also include a public health emergency declared by the Secretary of Health and Human Services (HHS) under the Public Health Service Act. Alex Azar, the Secretary of HHS, declared the COVID-19 pandemic a public health emergency on January 31, 2020.
Single-employer Defined Benefit Plan Funding Rules4
The bill includes a provision to provide single-employer defined benefit plan funding relief by giving companies additional time to meet their funding obligations that were due in 2020. Normally, payments of required minimum contributions due to a plan must be made by the plan sponsor no later than 8-1/2 months after the end of the plan year, and any shortfalls in funding from prior years must be paid quarterly. The CARES Act delays the due date for any contribution otherwise due during 2020 until January 1, 2021, although plans sponsors will owe interest on the delayed contributions. In addition, a plan sponsor may elect to treat the plan’s adjusted funding target attainment percentage (AFTAP) for 2019 as the AFTAP throughout 2020, which minimizes the impact that unpaid 2020 contributions would have on benefit restrictions under Section 436 of the Internal Revenue Code.
Application of Cooperative and Small Employer Charity (CSEC) pension plan rules to certain charitable employers whose primary exempt purpose is providing services with respect to mothers and children5
This provision amends the definition of CSEC Plans to provide that a pension plan will be a CSEC plan if, as of January 1, 2000, the plan was sponsored by an employer that (i) is exempt from taxation under Code section 501(c)(3), (ii) has been in existence since 1938, (iii) conducts medical research directly or indirectly through grant making, and (iv) has as its primary exempt purpose providing services with respect to mothers and children. This section is effective for plan years beginning after December 31, 2018.
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References: 1 CARES Act of 2020, H.R. 748, 116th Cong. § 2202 (2020) 2 CARES Act of 2020, H.R. 748, 116th Cong. § 2203 (2020) 3 CARES Act of 2020, H.R. 748, 116th Cong. § 3607 (2020) 4 CARES Act of 2020, H.R. 748, 116th Cong. § 3608 (2020) 5 CARES Act of 2020, H.R. 748, 116th Cong. § 3609 (2020)