March 31, 2020

The CARES Act: What do retirement plan sponsors need to know?

The new CARES Act (Coronavirus Aid, Relief, and Economic Security Act) stimulus package, designed to provide relief from the effects of the COVID-19 pandemic and quarantines, did not leave out retirement plans and retirement savers. The law includes several provisions that plan sponsors should be aware of, which are designed to help participants who may be struggling with additional financial burdens at this time. Below are some of the key provisions to be aware of:

Distributions

Participants will have the ability to withdraw up to $100,000 in 2020 if they are financially affected by COVID-19 and meet certain requirements, such as being diagnosed with the disease or having a spouse diagnosed with the illness, experiencing a lay-off or furlough, having reduced work hours, or being unable to work due to child-care issues). COVID-19-related distributions are free from the 10% early withdrawal penalty (although regular income taxes still apply). Those withdrawals may be re-contributed within three years without counting as part of the contribution maximum. If not re-contributed within that time period, taxes on COVID-19 distributions may be spread across a three-year period. At this time, plan administrators do not need to qualify plan participants for COVID-19 withdrawals; individuals may certify themselves as having met the requirements.

Loans

Participants impacted by COVID-19 in the above manner may also borrow up to $100,000 from their account (increased from the normal $50,000 loan limit), capped at 100% of their vested account value (up from the normal 50%). Loan repayments are suspended for the remainder of 2020 and, after 2020, any remaining loan amount may be reamortized, with the maximum loan term extended by the period of suspension. (It must be noted that while this move is to be applauded, as it makes resources immediately available to participants suffering hardship, as always, plan sponsors would be well advised to encourage their employees to avoid borrowing from their retirement savings if they have other options.)

Required Minimum Distributions (RMDs)

Typically, retirees over the age of 70 ½ are required to take minimum distributions from their accounts annually (over the age of 72 years beginning in 2020, thanks to the SECURE Act). RMDs from qualified defined contribution retirement plans have been waived for the entirety of 2020.

Defined Benefit Plan Funding

Employers may postpone 2020 funding requirements for defined benefit plans until January 1, 2021, but the deferred contributions will accrue interest that will need to be paid when they resume regular contributions.

If you have any questions about how the CARES Act may affect your plan or participants, or would like additional guidance, please feel free to contact your Arnerich Massena advisor.

For more information about how the CARES Act affects retirement plans, here are several helpful resources:

https://www.plansponsor.com/cares-act-passes-congress-including-retirement-relief/

https://www.barrons.com/articles/the-cares-act-will-allow-people-to-use-their-401-k-savings-penalty-free-and-defer-rmds-51585237324

https://www.wagnerlawgroup.com/resources/erisa/retirement-plan-provisions-of-cares-act

https://bracewell.com/insights/cares-act-provides-significant-relief-respect-distributions-qualified-retirement-plans

https://www.congress.gov/bill/116th-congress/senate-bill/3548/text