News & Events

CARES Act – Retirement Plan Distribution and Loan Rules Liberalized

With the economic fallout from the public health measures taken to mitigate the spread of the SARS-CoV-2 virus and COVID-19 disease, many employers have had to resort to unprecedented employment actions, including terminating, furloughing, or laying off employees, and dramatically altering historic employment benefit plans and perks.  The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) passed by Congress and signed by the President on March 27, 2020 includes two provisions designed to help affected employees during these difficult times by liberalizing the distribution and participant loan provisions applicable to most tax-qualified defined contribution retirement plans, like 401(k) and profit sharing plans, and Section 403(b) plans.

CORONAVIRUS-RELATED DISTRIBUTIONS

The following are the key elements of the new “coronavirus-related distribution” provision:

  • Coronavirus-related distributions of up to the lesser of the participant’s vested accrued benefit or $100,000 can be made between January 1, 2020 and December 30, 2020 to “qualified individuals.”
  • The $100,000 limit is determined on an affiliated group basis (i.e., considering all plans of all members of a controlled group or an affiliated service group).
  • Participants younger than 59 ½ are not subject to the 10% premature distribution penalty.
  • “Qualified individuals” include:
    • A participant who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease (COVID-19) under a CDC approved test;
    • The spouse or dependent (defined in Section 152) of a participant who is diagnosed with the virus or disease under a CDC approved test; or
    • A participant who experiences 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 the virus or disease; or other factors as determined by the Secretary of the Treasury (or the Secretary’s delegate).
      • The conditions under this last category must apply to the participant, not his/her spouse or dependents.
    • The Plan Administrator can rely on the participant’s certification that he/she is a “qualified individual.”
    • Federal income tax withholding is optional. Unless the participant elects otherwise, federal income tax will be withheld at the rate of 10%.
    • The amount of the distribution received can be included in the participant’s income ratably over three years.
    • All or part of the distribution can be repaid to the plan or another plan or IRA during the three-year period starting on the day after the distribution. Earnings on the distribution cannot be re-contributed.  The participant is not subject to income tax on the portion re-contributed.  Repayments can be made in multiple payments.

CHANGES IN PARTICIPANT LOAN RULES

  • The maximum aggregate loan limit is increased for a “qualified individual” (defined above) from $50,000 to $100,000, up to 100% (from 50%) of the participant’s vested accrued benefit.
    • Applies to loans made between March 27, 2020 and September 22, 2020.
  • A “qualified individual” can defer for up to one year, any payments due between the date of enactment (March 27, 2020) and December 31, 2020.
    • Subsequent payments must be adjusted and interest will continue to accrue.
    • This provision applies to loans outstanding on the date of enactment (March 27, 2020) and after.
  • This extension is ignored for purposes of the five-year term limit imposed under the Internal Revenue Code for loans not made to acquire the participant’s principal residence (so-called general purpose loans).

EMPLOYER ACTION ITEMS

Both provisions are optional with the employer.  Plan sponsors interested in adding one or both of these provisions are encouraged to consult with their recordkeeper to discuss the logistics of adding these provisions, including the timeline, the changes needed in administrative forms and processes, and the communications, if any, the recordkeeper will provide the plan sponsor.  We have seen many of the large plan recordkeepers proceed with automatically implementing these provisions in their customer’s plans absent the plan sponsor’s affirmative election within a narrow time period not to add them.

Plan amendments to implement these provisions are not needed at this time.  For most plans, an amendment is not required before December 31, 2022.

ALTERNATIVES FOR PARTICIPANTS WHO ARE NOT “QUALIFED INDIVIDUALS”

Participants who do not qualify for these provisions (assuming the employer adds them) who wish to access their plan account must qualify for a plan loan under the existing rules (if the plan allows loans), a distribution by reason of termination of employment, a hardship withdrawal (if the plan permits hardship withdrawals), or another in-service withdrawal (if permitted under the plan terms).