CARES ACT: RETIREMENT PLAN IMPACT
By Bill Barks
Director, Retirement Plan Services
 
The CARES Act was signed into law March 27, 2020. Below are the key provisions affecting retirement plans:
 
Hardship Distributions:  The CARES Act waives the 10% early withdrawal penalty tax under Internal Revenue Code Section 72(t) on early withdrawals up to $100,000 from a retirement plan or IRA for an individual:
  • who is diagnosed with COVID-19;
  • whose spouse or dependent is diagnosed with COVID-19; 
  • who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or
  • other factors as determined by the Treasury Secretary.
The legislation also permits those individuals to pay tax on the income from the distribution ratably over a three-year period and allows individuals to repay that amount into the plan over the next three years (presumably filing for a tax deduction on the taxes they will have paid as a result of the premature distribution). Those repayments would not be subject to the retirement plan contribution limits.
 
Plan Loans:  The CARES Act doubles the current retirement plan loan limits to the lesser of $100,000 or 100% of the participant's vested account balance in the plan. Individuals with an outstanding loan from their plan with a repayment due from the date of enactment of the CARES Act through Dec. 31, 2020, can delay their loan repayment(s) for up to one year. 

Retirement plans are not required to provide Hardships or Loans. If your plan does not offer Hardships or Loans, the CARES Act does not mandate you start to offer. If not in your plan presently, you can amend your plan to include.
 
Plan Amendments:  The legislation further permits retirement plans to adopt these rules immediately, even if the plan does not currently allow for hardship distributions or loans, provided the plan is amended on or before the last day of the first plan year beginning on or after Jan. 1, 2022, or later if prescribed by the Treasury Secretary. 
 
Temporary Waiver of Required Minimum Distribution (RMD) Rules:  The CARES Act waives RMDs for calendar year 2020 for Defined Contribution (DC) plans, including 401(k), 403(b), 457(b) and IRA plans, allowing individuals to keep funds in their retirement plans. Under current law, individuals generally at age 72 must take an RMD from their DC plans and IRAs. The legislation also includes special rules regarding the waiver period to, in essence, hold harmless those individuals (and plans) who took advantage of the RMD waiver for 2020.
 
Single-employer DB Plan Funding Rules:  The legislation provides single-employer defined benefit plan funding relief by giving companies more time to meet their funding obligations by delaying the due date for any contribution otherwise due during 2020 until Jan. 1, 2021. At that time, contributions due earlier would be due with interest. The provision also provides that a plan's status for benefit restrictions as of Dec. 31, 2019 will apply throughout 2020, such that a plan sponsor may elect to treat the plan's adjusted funding target attainment percentage for the last plan year ending before Jan. 1, 2020, as the adjusted funding target attainment percentage for plan years which include calendar year 2020.

For more information about how the CARES Act could affect your company's retirement plan, please contact Bill Barks at (317) 613-7867 or email him at bbarks@sponselcpagroup.com .