The CARES Act – Retirement Plan Relief
Many businesses have been impacted by the economic repercussions of the coronavirus (COVID-19) pandemic. The Coronavirus Aid, Relief and Economic Security (CARES) Act provides an unprecedented amount of relief to businesses and consumers impacted by the pandemic. While much of the discussion has been regarding financial relief for individuals, loans and other concessions for businesses, two key provisions also offer assistance for retirement plan participants and sponsors.
While minimum distributions are normally required by plan participants, the CARES Act provision allows plan sponsors to elect for the suspension of all required minimum distributions for 2020. This allows retirees the ability to leave funds in the plan for another year. Due to the current environment, this is advantageous as it might allow participants to ride the tide of the market. Please note, the Act states that required minimum distributions will be put back into place in 2021.
It also allows for coronavirus-related distributions of up to $100,000 without the application of the additional 10% premature distribution tax by the individual. This distribution is available from March 27, 2020, through December 30, 2020. Using this distribution, participants must repay partially or in full the withdrawal within three years.
Many plans allow for participants to take a loan up to a certain value or half of their vested account balance and have a repayment period through payroll deductions. The CARES Act made two changes regarding 401(k) loans; the Act:
- Allows participants to borrow up to 100% of vested account balance or up to $100,000 for loans made from March 27, 2020, to September 23, 2020.
- Provides plan participants an extra year if the loan was done in 2020. If your plan doesn’t allow for loans and you wish to add loans to your plan, it does require a change to the plan with the help of your Retirement Plan provider.
This also allows participants to suspend loan payments due on any outstanding or new loan between March 27, 2020, and December 31, 2020. Loan payments will resume in January 2021.
Do all individuals qualify for the relief outlined above?
The Act identified groups of people that need to meet a specific criteria to qualify for the items noted above:
- A participant who is diagnosed with COVID-19 or the virus SARS-CoV-2 by a test approved by the Centers for Disease Control and Prevention
- A participant’s spouse or dependent who is diagnosed with the virus
- A participant who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury (or the Secretary's delegate)