On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act, otherwise known as the CARES Act, was signed into law. The CARES Act includes provisions which increase flexibility for in-service plan distributions and enhanced loan rules. If selected by the plan sponsor, these optional provisions will give participants impacted by the coronavirus pandemic enhanced access to retirement plan funds. Keep in mind, the coronavirus-related distribution and loan limit increase provisions are optional. Some of the options will not go into effect unless you opt to affirmatively add them to your plan. With that in mind, some recordkeepers may have automatic defaults that plan sponsors should know. Here are some of the highlights that you should be aware of as a sponsor of a retirement plan.
Plans may permit coronavirus-related distributions from a participant’s vested account balance through December 31, 2020.
- Distribution cannot exceed $100,000 in the aggregate from all related employer plans
- Participants are exempt from the 10 percent early withdrawal penalty which is generally applicable to distributions by those who are 59 and 1/2 or younger
- Distributions are not subject to the 20 percent mandatory tax withholding
- Distributions are eligible to be indirectly rolled into an IRA or employer plan within three years from the date the distribution is taken
- Amounts not indirectly rolled into an IRA or employer plan are included in gross taxable income, ratably, over three tax years (beginning with the tax year of the distribution), unless the participant elects to include all amounts in a single tax year
Coronavirus-Related Loan Relief
Subject to plan approval, there are two types of loan relief provisions in the CARES Act
- For the 180-day period beginning on March 27, 2020, certain retirement plans may now allow qualified individuals to borrow up to the lesser of $100,000 or 100% of their vested account balance
- Loan payment suspension for up to one year - An eligible participant can request a loan payment suspension if the outstanding loan is in good order for a period of up to 12 months. This relief expires on December 31, 2020. The loan must be repaid by the end of the original term of the loan. The loan payments may be repaid by
- Continuing the original payments with a balloon payment of the missed installments at the end of the term or
- Re-amortized after the delay to cover unpaid interest and missed payments during the remainder of the repayment period
To be eligible to take a Coronavirus-Related Distribution or loan, the individual participant, or his or her spouse or dependent, must have been diagnosed with COVID-19 or suffered adverse financial consequences due to COVID-19 (e.g., furlough, reduction in hours, unable to work due to childcare, loss of business, etc.) A plan sponsor may rely on a participant’s certification of the above and will not need to ask for proof.
Plans are permitted to implement coronavirus-related distributions and/or enhanced loan provisions immediately clients are asked to, please notify BST & Co. prior to doing so. The deadline to amend plans to include language permitting these distributions is the last day of the plan year beginning on or after January 1, 2022.
Waiver of 2020 Required Minimum Distributions (RMDs)
The CARES Act waives the requirement for any RMD that is required to be paid in 2020. This waiver includes 2019 RMDs which normally would be due by April 1, 2020. Additionally, a 2020 RMD may be rolled over to an IRA or employer plan. The following people would qualify for the waiver:
- Participants who turned age 70½ prior to 2019
- Participants who turned age 70½ in 2019 and who did not receive their first RMD for 2019 on or before April 1, 2020
- Beneficiaries receiving life expectancy payments
- Beneficiaries who have an account balance in the plan subject to the five-year distribution rule may extend their required distribution by one year (full distribution of the account must be made by the sixth anniversary of the participant’s death)
If you feel the need to reduce or eliminate the employer contributions to your plan, you may be able to do so. Reducing or eliminating nonelective and discretionary matching contributions to a 401(k) plan does not need a plan amendment. However, it’s important to communicate the changes to plan participants. If your profit sharing or matching contribution is discretionary and you haven’t yet filed your 2019 tax return (it is on extension or was originally due 4/15 and automatically extended to 7/15/2020) you can still change your mind and eliminate the discretionary contributions for 2019.
Although it is too late to eliminate 2019 safe harbor contributions, generally, an employer may suspend or reduce safe harbor contributions midyear if they fall under the below two exceptions.
- Company is operating at an “economic loss”
- An employer must have included in the annual safe harbor notice, which is required to be delivered to employees, a statement that the plan may be amended in the upcoming year to suspend or reduce safe harbor contributions and that the suspension or reduction will not apply until at least 30 days after all eligible employees receive a supplemental notice of the suspension or reduction
Under both exceptions, employees must receive the supplemental notice, and the suspension or reduction cannot take effect until no earlier than the later of the date the plan is amended or 30 days after the supplemental notice is provided. In addition, employees must have a reasonable opportunity after receipt of the supplemental notice to modify their elective contributions. Finally, the plan must be amended to require the nondiscrimination testing that the safe harbor contributions would have enabled the employer to avoid.
If an employer who desires to suspend or reduce safe harbor contributions in 2020 had not included a statement in this year’s safe harbor notice that the employer was reserving the right to suspend or reduce safe harbor contributions, the employer will be required to rely upon the economic loss exception. For plan years beginning after Dec. 31, 2019, the SECURE Act eliminated the requirement that an employer who makes nonelective safe harbor contributions must disseminate an annual safe harbor notice. Guidance from the IRS will need to be forthcoming as to how this change impacts the ability of an employer to suspend or reduce non-elective safe harbor contributions.
The new rules must be carefully considered in the best interest of the plan and its participants. If you need guidance on how these changes impact your plan or its operating procedures, please contact Jillian Breck at firstname.lastname@example.org or call 518-689-9343.