United States: Retirement Relief Provisions Under The CARES Act

We continue to breakdown important provisions of the Coronavirus, Aid, Relief, and Economic Security (CARES) Act, passed on March 27, 2020. This Client Alert addresses the key provisions affecting retirement plans.

Coronavirus-Related Distributions

The CARES Act allows retirement plans to offer "coronavirus-related distributions" up to $100,000. It also allows individuals to withdraw up to $100,000 from an IRA. An individual may only withdraw $100,000 in the aggregate, from either or both, in total. Because the aggregate amount is for an individual, a spouse may withdraw an additional $100,000 from their retirement plan and/or IRA account. The CARES Act waives the 10% early withdrawal penalty for individuals under age 59½ who take these distributions. The distributions may be taken ratably into income over three years at the election of the individual.

To qualify, the distribution must be taken during 2020 (before December 31), and the participant must (i) have been diagnosed or have a spouse or dependent who was diagnosed with SARS–CoV–2 or COVID-19 by a test approved by the CDC, or (ii) have experienced "adverse financial consequences" as a result of being quarantined, furloughed, laid off, unable to work due to lack of child care, experiencing a closing or reduction of hours of a business owned by the individual, or other factors determined by the Secretary of Treasury.

Similar to other recent qualified disaster relief and the adoption expense provision in the Setting Every Community Up for Retirement Enhancement (SECURE) Act, these distributions may be repaid to the retirement plan or IRA as a rollover within three years after the distribution.

Retirement Plan Loans

The Act increases the borrowing limit on plan loans from qualified employer plans, such as 401(k) or 403(b) plans. The limit doubles from the lesser of $50,000 or 50% of the participant's vested account balance, to the lesser or $100,000 or 100% of the participant's vested account balance. You must be a "qualified individual," meaning someone who meets the requirements for a coronavirus-related distribution, as described above, to be eligible for such a loan.

In addition, the CARES Act delays by one year the deadline for qualified individuals to make loan repayments that are otherwise due between the date of enactment and December 31, 2020.

Temporary Waiver of Required Minimum Distributions

The bill waives 2020 Required Minimum Distributions (RMDs) for 401(k), 403(b) and 457(b) plans, allowing individuals to keep funds in their retirement plans. It also waives RMDs for owner and inherited IRAs, including SEP IRAs and SIMPLE IRAs. The waiver does not apply to defined benefit plans.

The RMD waiver does not impact any individual that wants to make a Qualified Charitable Distribution. Individuals age 70½ and older may contribute up to $100,000 to a qualified charity from their IRA in 2020 regardless of the waiver.

Plan Amendments

Plan sponsors are permitted, but not required, to allow RMD waivers in 2020. This applies to coronavirus-related distributions and the retirement plan loan rules, which are also voluntary provisions.

The CARES Act permits retirement plans to adopt these rules immediately, even if the plan does not currently allow for hardship distributions or loans, provided that the plan is amended on or before the last day of the first plan year beginning on or after January 1, 2022, or later if prescribed by the Treasury Secretary.

Single-Employer Defined Benefit Plan Funding

The CARES Act allows sponsors of single-employer defined benefit plans to delay payment of minimum required contributions for the calendar year 2020. Delayed contributions must be made with interest by January 1, 2021. A plan sponsor also has the option under the Act to use the plan's adjusted funding target attainment percentage for the last plan year ending before January 1, 2020 as the percentage for plan years which include calendar year 2020.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.