The CARES Act Impacts Qualified Retirement Plans and IRAs: Temporary Relief for Employees, Plan Participants and IRA Owners

Key provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) enacted on March 27, 2020 that affect retirement plans include the following:

Required Minimum Distributions (“RMDs”):  The CARES Act waives RMDs for calendar year 2020 for defined contributions plans, including 401(k), 403(b), 457(b) plans and IRAs, thereby allowing individuals to keep funds in their retirement plans and avoid taking distributions based on 2019 asset valuations. Under current law, individuals generally at age 72 (70½ for individuals who turned 70½ in 2019) take an RMD from their defined contribution plans and IRAs. We provide more details about the RMD waiver here.

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 individuals impacted COVID-19, including a person (i) who is diagnosed with COVID-19; (ii) whose spouse or dependent is diagnosed with COVID-19; and (iii) 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

The legislation 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.  We provide more details about the hardship distribution provision here.

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. Plan participants with an outstanding loan from their plan with a repayment due from the date of enactment of the CARES Act through December 31, 2020, can delay their loan repayment(s) for up to one year. A detailed summary of the new loan rules is here.

Plan Amendments: The CARES Act permits retirement plans to adopt the above temporary, and optional, 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 January 1, 2020, or later if prescribed by the Treasury Secretary.

Extended Deadline for Funding of Single-employer Defined Benefit Plan: The CARES Act provides single-employer defined benefit plan funding relief by extending the due date of minimum required contributions otherwise due in 2020 to January 1, 2021. The delayed contributions must be increased by interest accrued from the original due date to the delayed payment date at the effective interest rate for the plan for the plan year of the payment date. The provision also provides that plan sponsors of certain underfunded plans may elect to treat the plan’s adjusted funding target attainment percentage (“AFTAP”) for the last plan year ending before January 1, 2020, as the adjusted funding target attainment percentage for plan years which include calendar year 2020.

Postponement of Certain Deadlines: The CARES Act allows the Department of Labor to postpone certain deadlines under ERISA. We expect the deadlines for filing of Form 5500 and Form 5500-SF, as well as other benefit plan filings, will be extended.

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