THE CARES ACT
In response to the ever-increasing financial challenges from the coronavirus (COVID-19) pandemic across the U.S. economy, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020. With many Americans facing significant financial burdens as a result of COVID-19, the Act is designed to provide some relief by allowing them to supplement their income through retirement plan distributions, loans, and/or delaying loan repayments. The Act also includes other significant provisions, including but not limited to, a waiver of required minimum distributions (RMDs) and funding relief for defined benefit plans. The CARES Act and other changes are designed to assist Americans during this financial crisis with retirement plans, health-related provisions, and even tax deadlines. Below, please find some key provisions:
Required Minimum Distribution
This year, the required minimum distribution (RMD) from qualified defined contribution retirement plans has been waived. Typically, for retirees over the age of 70 ½, there is an annual RMD from their accounts. Note: as a result of the SECURE Act, beginning in the 2020 tax year, the new age for a RMD is over the age of 72.
The Act provides for COVID-19-related distributions (CRDs) from qualified retirement plans, in which individuals would be able to withdraw up to $100,000 in aggregate from eligible retirement plans without a 10% pre-59 ½ early distribution penalty (however, income taxes still apply). This provision applies to retirement plans, including defined benefit plans and defined contribution plans, including 401(k)/403(b)/457(b) plans, profit sharing, money purchase, ESOP, 403(a) annuities, and IRAs.
Generally, a CRD is a distribution made during 2020 to a qualified individual, defined as: an individual (including spouse or dependent) who is diagnosed with the COVID-19 disease or an individual who experiences adverse financial consequences as a result of COVID-19, including but not limited to being quarantined, furloughed, or laid off; having reduced work hours; unable to work due to lack of childcare; experiencing closure or reduced hours of a business owned or operated by the individual; and other factors as determined by the Treasury Secretary.
The Act allows for repayment of CRDs to be made to an eligible retirement plan or an IRA 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 CRD distribution requirement.
Loans and Loan Repayments
If implemented by plans, participants impacted by COVID-19, as previously described, may be able to borrow up to $100,000 from their account (this amount is an increase from the usual $50,000 loan limit), capped at 100% of their vested account value (increased from 50%). Further, loan repayments are suspended for the remainder of 2020 and, after 2020, any remaining loan amount may be re-amortized, with the maximum loan term extended by the period of suspension. Specifically, this increased loan amount applies to loans made during the 180-day period beginning on March 27, 2020. For repayments, the retirement plan loan repayment dates that occur from March 27, 2020 to December 31, 2020, may be delayed for one year, with the amortization period adjusted accordingly (including the five-year repayment deadline). Plan sponsors would be well advised to encourage their employees to avoid borrowing from their retirement savings if they have other liquidity options available.
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 with the resumption of regular contributions. In addition, employers would also have the option to utilize an alternative funding target percentage.
In Notice 2020-18, as a result of COVID-19, the Internal Revenue Service (IRS) delayed the filing of federal income tax return returns and delayed making required tax payments to a new deadline of July 15, 2020. The delay applies to individuals, trusts, estates, partnerships, associations, companies, and corporations. It is expected that other actions typically required by April 15 that are related to tax filing — such as 2019 IRA and HAS contributions or certain retirement plan contributions — are similarly delayed until July 15, 2020. We expect the IRS may provide additional guidance in the coming months. Note: affected taxpayers do not have to file Forms 4868 or 7004. Further, there is no limitation on the amount of the payment that may be postponed.
Health-Related, Employee, and Small Business Provisions
The Act provides that health insurance plans can pay for telehealth and remote care services without first requiring an individual to satisfy a deductible. Such payments will be deemed not to violate existing HSA requirements. This relief applies to plan years that begin on or before December 31, 2021 and promotes diagnosis and treatment while helping individuals avoid possible risky in-person contact.
New qualified medical expenses, including some medicines and products, will not be required to be “prescription” to be qualified medical expenses for HSA, HRA, MSA, and health FSA purposes. Further, the CARES Act specifically includes over-the-counter menstrual care products. Note: in Notice 2020-15, the IRS issued guidance for HSAs — without affecting eligibility to make HSA contributions — to waive or reduce deductibles for “medical care services and items purchased relating to testing for and treatment of COVID-19.” In short, the guidance expanded the scope of the “preventive” care exception.
On April 1, in the Families First Coronavirus Response Act (FFCRA), the U.S. Department of Labor (DOL) announced both emergency paid sick leave and further expanded the family and medical leave implementation. The FFCRA is designed to help American workers and small private employers (fewer than 500 employee) deal with the workplace effects of COVID-19. In short, the FFCRA is designed to provide employees with paid leave for specific reasons related to COVID-19, ensuring that workers are not forced to choose between a paycheck and public health measures. For employers, the law reimburses employers who keep their workers on their payrolls by providing tax credits for the cost of providing employees with the paid leave. Further, in the Unemployment Insurance Program Letter No. 14-20, the DOL outlined relevant provisions of the CARES Act applicable to the eligibility criteria for state unemployment insurance (UI) programs, including Pandemic Unemployment Assistance for those typically not eligible for UI. This too is designed to provide much-needed relief for Americans impacted by COVID-19.
Guidance on Retirement Plan Amendments
Generally, plan sponsors must amend their retirement plans for these provisions by the last day of the 2022 plan year or such other date as prescribed by the Treasury Secretary. However, there must be operational compliance during the interim period.
Even though the CARES Act represents the largest relief package in U.S. history, there may be additional relief provided by local and federal government. We expect there will be ongoing issues to address as people begin to navigate and implement these changes. 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 and/or attorney to comply with the new laws.
IMPORTANT DISCLOSURES: These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—Arnerich Massena cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.