CARES Act Expands Participant Loan Provisions and Waives RMD for 2020 and Waives RMD for 2020

by Sharon K. Freilich and George J. Kasper

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) enacted on March 27, 2020, in response to the current coronavirus pandemic (the “Pandemic”) contains several provisions that impact the operation of tax-qualified retirement benefit plans and IRAs in 2020.  Specifically, the CARES Act adds Coronavirus-Related Distributions; expands participant loan provisions which apply to any retirement plan permitting participant loans (“Pandemic Loans”) and adds a waiver of the 2020 Required Minimum Distribution (“RMD”), among other things.  This article focuses on the changes to participant loans and RMDs.  For information regarding Coronavirus-Related Distributions, please click here.

Which participants are eligible to request a Pandemic-Related Loan?

Only participants who satisfy the following conditions are eligible to request a Pandemic-Related Loan:

  • they are diagnosed with the virus SARS-CoV-2 or COVID-19 (aggregately “COVID-19”) by a CDC approved test; or
  • their spouse or dependent is so diagnosed; or
  • they experience adverse financial consequences as a result of being quarantined, furloughed, laid off, working reduced hours due to COVID-19, unable to work due to lack of child care due to the COVID-19 or other factors determined by the Secretary of the Treasury (a “Qualified Individual”)

A Plan Administrator can rely on the participant’s certification that the participant is a Qualified Individual when requesting a loan.

How do Pandemic-Related Loans differ from the usual participant loan requirements?

A Qualified Individual can borrow the lesser of (i) their entire vested interest in the plan, or (ii) $100,000.  These loans are only available during the 180 day period beginning on March 27, 2020 and ending September 22, 2020.  Under the normal rules, the maximum loan cannot exceed the lesser of fifty percent (50%) of a Participant’s vested interest in the Plan or $50,000.

  • Guidance is needed regarding to what extent the outstanding balance of any participant loan(s) on March 27, 2020, will be considered for purposes of determining the maximum Pandemic-Related Loan.

In addition to making Pandemic-Related Loans available to Qualified Individuals, the CARES Act has extended the repayment period for any Qualified Individual’s participant loan which was outstanding on March 27, 2020.  If the final payment for such loan is due between March 27, 2020 and December 31, 2020, the repayment period is extended for one (1) year from the original final payment due date.  Any participant loan with an extended repayment period will need to be reamortized to reflect the new final due date for the loan.

The changes the CARES Act made to Code Section 72(p)(2)(A) suggest that the changes are mandatory.  For example, there is no language to indicate that a Qualified Individual can elect to have his or her outstanding participant loan reamortized and extended for an additional year or keep the existing repayment schedule.

  • Guidance is needed regarding how the extended loan repayment provisions are to be implemented.

Does the temporary waiver of the RMD apply to all retirement plans?

No, the RMD waiver for 2020 only applies to tax-qualified defined contribution plans (including 401(k) plans), Section 403(b) Plans, Section 403(a) annuity or a governmental Section 457(b) Plans, and IRAs.  The RMD waiver does not apply to defined benefit plans.

Are there special RMD rules for individuals who turned 70½ in 2019?

Yes.  If an individual turned 70½ in 2019, and did not take an RMD in 2019, no RMD will be required to be taken by April 1, 2020 or by December 31, 2020.

Do qualified plans need to be amended to reflect the new CARES Act provisions?

Qualified Plans and IRAs can be operated in accordance with the provisions of the CARES Act and related Treasury and U.S. Department of Labor guidance immediately.  Plan amendments to reflect the CARES Act provisions will need to be adopted by the last day of the plan year beginning on or after January 1, 2022.  Government plans have until the last day of the plan year beginning after January 1, 2024 to adopt such amendment.

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