CARES Act and Retirement Plans: What You Need to Know
On Friday, March 27, 2020, President Trump signed the bipartisan Coronavirus Aid, Relief, and Economic Security Act (CARES Act) into law. This law provides relief to retirement plan participants in a number of ways. According to the Act, new options can be added to the Plan, but are not required to be offered, excluding the Required Minimum Distribution (RMD) Waiver for 2020:
1. Coronavirus Related Distribution Option
- Distribution of up to $100,000 across all qualified plans.
- No 10% early withdrawal penalty for those under 59 ½, or required 20% withholding at time of distribution, and taxes can be spread out over three years.
- A participant may make repayments to an eligible retirement plan, over 3-years from the distribution date. These repayments would be treated as a qualified rollover, and not subject to income tax.
- Window of distribution to eligible participants is from January 1, 2020 to December 31, 2020.
- Participants are eligible for a distribution if:
- Participant, spouse, or dependent is diagnosed with a COVID-19 or SARS-CoV-2 by a CDC approved test.
- Suffering “adverse financial consequences” as a result of quarantine, lay-off, reduced hours, lack of child care, or other factors determined by the IRS.
- Plan Sponsors may rely on a participant’s self-certification of meeting the requirement for distribution.
2. Higher Loan Limits Option
- Plan loans up to the lesser of $100,000 or 100% of account balance (up from $50,000 or 50% of balance) are allowed.
- Participant eligibility for higher loan limit would follow same rules noted above and available for 180 days following date of enactment (March 27th).
3. Required Minimum Distribution (RMD) Waiver Option:
- Any RMDs for 2020 can be waived, including RMDs already distributed.
4. Delay Repayment of Plan Loans Option (N/A if do not allow or intend to allow plan loans)
- Upon request of participant, must suspend loan repayments of loans in good order for a period of up to 12 months, eligible participants follow same coronavirus ‘effected’ rules noted above.
- Applies to any existing loan, even if prior to enactment of CARES Act.
- Applies to new loans taken out from date of enactment until December 31, 2020.
- Any subsequent repayments must be adjusted to reflect the delay and interest accrued during the delay, even if new payment schedule extends past five years from loan origination date.
Plans adopting the coronavirus related distributions and/or loans, must formally amend documents by the end of the 2022 plan year for private sector plans and by the end of the 2024 plan year for governmental plans.
If you have specific questions about your organization’s plan, contact your
M3 Financial Retirement Plan Consultant.
Investment advisory services offered through M3 Financial, a registered investment advisor.