Authored by Cris Jones
The Coronavirus Aid, Relief and Economic Security Act (the CARES Act) was signed into law on Friday, March 27, and includes coronavirus (COVID-19) relief applicable to eligible retirement plans (including 401(k), 403(b), and governmental 457 plans and IRAs) and for the benefit of participants who are coping with the COVID-19 pandemic. This update summarizes two sets of key changes.
First, the CARES Act allows participants to take “coronavirus-related distributions” of up to $100,000 in the aggregate from their retirement plan accounts sponsored by the same controlled group employer. A participant may take such distributions between now and the end of 2020 if the participant or their spouse or dependent is diagnosed with COVID-19 by a test approved by the CDC or if they experience adverse financial consequences as a result of a quarantine, furlough, layoff, or reduction of hours due to COVID-19, or other related financial hardships (namely, being unable to work due to lack of child care due to COVID-19, or the closing or a reduction in hours of a business owned or operated by the individual due to COVID-19).
Early distributions from retirement plans are generally subject to a 10% withdrawal penalty, but the CARES Act waives this penalty for coronavirus related distributions and waives income tax withholding. Moreover, instead of being subject to taxes in the year they receive a coronavirus related distribution, participants will have the amount of the distribution included in their income ratably over a three-year period, thereby spreading the potential tax burden over time. Participants can then repay their retirement plan accounts in one or more installments within three years without regard to the annual limit on contributions.
In addition, the CARES Act increases through September 23, 2020 the maximum amount that participants who are eligible for a coronavirus-related distribution can borrow from their employer-sponsored retirement plan account, up to a maximum amount equal to the lesser of $100,000 (compared to $50,000 generally) and 100% of their vested account balance (compared to 50% generally). The law also extends for one year the due date on repayments of loans from employer-sponsored retirement plans that are due through the end of 2020 for eligible participants.
Retirement plan sponsors and administrators should consult with legal counsel concerning the operational implementation of these new rules. For now, plan amendments must be made to incorporate the rules no later than the last day of the plan year beginning on or after January 1, 2022, meaning December 31, 2022 for calendar year plans.