As most are hurrying to interpret the CARES Act’s headlines, it is easy to overlook the $8 billion afforded to defined-contribution retirement plans. This article focuses on those dollars.
The following are key provisions impacting plans, and which are helpful both to employees and employers:
The IRS would normally impose a 10% tax in addition to an individual’s income tax rate on early distributions from 401(k), 403(b), employee stock ownership plans (ESOPs), simplified employee pensions (SEPs), and other plans meeting the requirements of section 401(a). The CARES Act waives this penalty in the case of certain distributions. These distributions are meant for qualified individuals who have contracted COVID-19, have a spouse or dependent that has contracted the virus, or have been financially impacted, i.e., the virus has hindered their ability to maintain their income. If your child’s day care was shut down, and now you’re home with reduced hours at your hourly job, then guess what? You qualify. Employees are permitted to self-certify their qualified status, meaning the onus is on the employee and not on the employer. CARES Act distributions are not unlimited; they are capped at $100,000 and must be distributed during calendar year 2020. Keep in mind you will still receive a 1099-R and be taxed at your normal income tax rate. The CARES Act does provide individuals a chance to avoid the premature tax liability through a 3-year window to fully or partially repay their distribution, or recontribute the distribution to the plan. Form 1040 will incorporate an adjustment to ensure filers are given credit for their repayments.
The federal government also extended relief to qualified individuals in the form of participant loans (for those plans that feature them). Rather than the normal cap of the lesser of $50,000 or 50% of the participant’s vested balance, that’s now doubled to the lesser of $100,000 or 100%. The increase is temporary – it will only remain available for loans initiated by September 23, 2020. For those qualified individuals who initiated a loan prior to March 27, the date the CARES Act was passed, there is still an election available to suspend repayments on your existing loan through December 31, 2020.
For individuals above 70½ years old, the required distributions from your retirement plan can be postponed during 2020. That means no 2020 1099-R (unless you already had a withdrawal) and no income tax. The stock market took a huge hit, e.g., the S&P 500 declined 20% in Q1 and was the largest quarterly decline since 2008, and for those in retirement status, it is far from an ideal time to withdraw funds. The CARES Act gives retirees the opportunity to keep their savings invested to recoup much (and hopefully all) of those losses suffered.
Employers may also be wondering whether a plan amendment is needed for these changes. Eventually, a plan amendment will be necessary; but for now administrators can operate their plans in accordance with these new rules and amend them no later than the last day of the first plan year beginning on or after January 1, 2022.
In addition to one-time tax rebates, grants to small businesses, and a boost in unemployment benefits, the CARES Act relaxes these key retirement plan rules to offer another avenue of much-needed relief to employees and employers. For any questions regarding these provisions, please contact a member of Withum’s Employee Benefits Plan Services Group and visit and visit Withum’s COVID-19 Resource Center for insights to help you and your business during this challenging time.