From Jan. 1 through Dec. 30, a plan is permitted, but not required, to allow qualified individuals to treat a 401(k) plan distribution as a coronavirus-related distribution, or CRD. These distributions (up to $100,000) are not being subject to the 10% early withdrawal tax for distributions prior to age 59.5 and are taxed pro rata over a three-year period. An individual's designation as a qualified individual under the CARES Act only needs to be certified by the plan participant.
The employer/plan sponsor has no duty to inquire whether an individual has in fact satisfied the conditions. If an Employer wants to revoke the ability for a plan distribution during the 2020 year, they should adopt a formal plan amendment with corporate resolutions and distribute a summary of material modification as soon as possible thereafter. Remember to see the DOL's new electronic disclosure rules. Contact me and I will send you our memo on it.
Qualified plans are permitted to increase their loan amounts to $100,000 and 100% (from $50,000 and 50%) of a participant's account balance. The increased limit started March 27 and ended September 22, 2020. An employer that chose to increase the loan limit under the CARES Act must revert back to pre-existing limits (Section 72(p) of the Code) are reinstated with respect to any loans that were made beginning after September 22.
Additionally, loans after September 22, 2020 will not be permitted the increased limits of the CARES Act. Good employee communication informing them of the old normal loan limits is prudent, particularly with respect to a plan that has had a high usage rate for loans under the increased limit.
The CARES Act permits loan payments due between March 27 and Dec. 31 to be suspended for one year. Internal Revenue Service/Treasury Notice 2020-50 creates a safe harbor for plan sponsors who choose to provide the suspensions for qualified employees. The loan repayment suspension is available with respect to a loan that is outstanding on or after March 27, with a payment due date that occurs during the period beginning on March 27 and ending on Dec. 31. Loan repayments are to resume after Jan. 1, 2021.
The term of the loan may be extended by up to one year from the date the loan was originally due to be repaid. Interest accrued during the suspension period must be added to the remaining principal loan balance. Plan sponsors/employers are allowed to offer this loan payment suspension to qualified individuals, however it is up to the employee/participant to decide whether to take the suspension. Once again good employer communication can resolve a lot of problems with employee morale.
I recommend early adoption of CARES act amendments. Although we have until the end of next year to make sure our plan document is amended to comply with changes made in 2020 regarding the above items discussed, I think people can forget too easily. I would recommend implanting good corporate governance now and adopt your CARES act amendments sooner rather than later.
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