CARES Act Provides Early Access to Retirement Funds and Other Retirement Plan Relief

3/27/2020

by Kathy D. Aslinger, Esq.
March 27, 2020

Note: Other COVID-19 related articles can be found here, here, and here.

CARES Act provides early access to retirement funds and other retirement plan relief due to COVID-19

The much-awaited phase three of coronavirus-related legislation passed the House and was signed into law the afternoon of March 27, 2020. Known as the Coronavirus, Aid, Relief and Economic Security (“CARES”) Act, the almost 1,000-page stimulus package contains several provisions impacting retirement plan access and operation.

To aid employees struggling financially due to COVID-19, the CARES Act provides easy access to retirement funds through coronavirus-related distributions and loans. 

To aid plan participants who are subject to required minimum distributions (“RMDs”) and who would prefer to avoid distributions at a time the market is significantly down, the Act waives RMD requirements for 2020.  We have summarized these and other relief provisions below.

Distributions

The CARES Act creates a new type of hardship distribution called a “coronavirus-related distribution,” which is available to plan participants who:

(1) are diagnosed with COVID-19;

(2) have a spouse or dependent diagnosed with COVID-19; or

(3) experience adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, or being unable to work due to lack of childcare resulting from COVID-19. 

If coronavirus-related distributions are added to a plan, qualifying individuals may take a distribution in an amount up to $100,000, which is exempt from the 10% early withdrawal penalty. 
Participants taking a distribution may spread the income tax liability over a three-year period, as well as repay the distribution tax free over the next three years.

These provisions may be added to “eligible retirement plans,” which include qualified plans (including both defined contribution and defined benefit plans), 403(b) plans, governmental 457(b) plans, and individual retirement accounts (“IRAs”).  Plans may adopt coronavirus-related distributions even if they do not otherwise permit hardship distributions.

All coronavirus-related distributions must be taken before December 31, 2020.

Plan Loans

The CARES Act also increases the loan limits to the lesser of $100,000 or 100% of a participant’s vested account balance—raised from the lesser of $50,000 or 50% of a participant’s vested account balance—for any participant who meets the eligibility conditions described above for a coronavirus-related distribution.

Additionally, any qualified participant meeting the criteria described above with an outstanding loan during the period beginning on enactment and ending December 31, 2020, may delay repayment for one year.

Waiver of Required Minimum Distributions (“RMDs”)

Not all CARES Act provisions take money out of participants’ retirement accounts.  For participants who are concerned about the volatile stock market and who would prefer to keep funds in their accounts to give the market time to improve, the Act waives RMDS for 2020 for participants over the age of 72.  The waiver applies to distributions from defined contributions plans, including 401(k), 403(b), and governmental 457(b) plans, as well as IRAs. 

Amendments

The Act permits a retirement plan to implement these changes immediately, so long as the plan is amended to incorporate the changes on or before the last day of the first plan year beginning on or after January 1, 2022 (i.e., before December 31, 2022 for a calendar year plan).  Governmental plans have an additional two years to adopt an amendment.

Funding Delay for Defined Benefit Plans

Employers facing minimum funding deadlines for their defined benefit pension plans while suffering from reduced income due to COVID-19 also see some relief.  The CARES Act delays 2020 minimum funding deadlines for plans subject to the Employee Retirement Income Security Act (“ERISA”) to January 1, 2021.

Generally, employers must contribute the minimum required contribution no later than 9 ½ months following the end of a plan year, which is September 15 for a calendar year plan.  The Act delays the due date for any minimum funding due during 2020 to January 1, 2021.  The required contribution must be contributed by January 1, 2021, with interest calculated from the original due date.

Expansion of DOL Authority to Delay Deadlines

Finally, the CARES Act expands the authority of the DOL to delay certain deadlines under ERISA to include a public health emergency declared by the Secretary of Health and Human Services under the Public Health Service Act.

Our attorneys are continuing to monitor the impact of the ever-changing COVID-19 landscape to employers.

If you have questions, please reach out to us at 865-546-7311.