On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed and became immediately effective. What does this mean for employee benefit plans? The major changes are summarized here.
The CARES Act created an option for qualified individuals to take up to $100,000 as a distribution during 2020 from their plan balances.
- Qualified individuals include participants, their spouses or immediate dependents that have been diagnosed with the coronavirus. Also included in the qualified group are participants who experience adverse financial consequences as a result of quarantine, furlough, layoff, reduced hours, inability to work due to lack of childcare and closing of a business the individual owned or operated.
- Any 10 percent early withdrawal penalty that participants under age 59 ½ would have incurred has been waived, and participants have the option to either pay the tax all in one year or spread out the tax owed across three years. These distributions will be self-certified by participants per the law. Amendments to plan documents to allow for these distributions must be completed by Dec. 31, 2022, for calendar year-end plans.
- Offering these distributions is not mandatory; it is the plan sponsor’s choice. The plan sponsor also has the choice to turn on the coronavirus related distributions for lessor amounts. (For example, a plan sponsor could choose to allow the distributions up to $50,000 instead of $100,000.)
Another impact on distributions relates to required minimum distributions (RMDs).
- All RMDs for 2020 were waived.
- Employees who have already taken an RMD during 2020 are allowed to roll it back into their plan as long as it is within 60 days of the original distribution. It is important to note that if an employee is taking RMDs as monthly installments, only one of the monthly distributions can be rolled back into the plan.
The CARES Act also created new plan loan provisions.
- These provisions are available to qualified individuals as defined above. Qualified individuals are allowed to take loans for the lessor of 100 percent of their vested balances, or $100,000 (increased from 50 percent of their vested balances, or $50,000).
- This increased loan availability is only for 180 days after the act was placed in effect.
Loan payment requirements were also changed.
- If someone had a loan as of March 27, 2020, or if a new loan is entered into during 2020, no payments are required.
- Participants can choose to continue to make payments if they do not want to defer them.
- If payments are delayed, interest will still accrue on the loan balances during 2020 and will be added to the total amount due. This will result in higher loan payments for participants going forward, as the loans will be re-amortized beginning Jan. 1, 2021.
- The loan provision changes are also optional for plan sponsors.
Finally, for defined benefit plans, the CARES Act has included an option to delay minimum required funding until Jan. 1, 2021.
- They will also be allowed the use of the 2019 Adjusted Funding Target Attained Percentage again for the 2020 plan year end.
So what should be done now? Any changes that are made to plans should be communicated to participants. Plan sponsors should discuss with their third-party administrators and auditors what these changes might mean for the 2020 plan year, including getting the ball rolling on the required plan amendments and requesting suggestions for what documentation to keep to make the 2020 plan audits as smooth as possible.
Changes in legislation are frequently occurring, so keep informed, and keep safe and well.
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