The CARES Act: What SMBs need to know about how it affects retirement plans

7 MIN READEditorial Policy

The $2 trillion Coronavirus, Aid, Relief and Economic Security (CARES) Act, signed into law by President Trump on March 27, 2020, is more than 800 pages long and includes five key provisions that impact retirement plans. Here’s what you need to know if you’re involved in the administration of a 401(k) plan at your company:

1. Coronavirus-Related Distributions (CRDs) (Section 2202(a))

In short: Affected participants have greater access to retirement funds in eligible retirement plans in 2020 (works similar to hardship withdrawals).

The CARES Act waives the 10% early withdrawal penalty tax on early withdrawals up to $100,000 for an individual:

  • diagnosed with COVID-19;

  • whose spouse or dependent is diagnosed with COVID-19;

  • 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; or other factors as determined by the Treasury Secretary.

The legislation also permits those individuals to pay tax on the income from the Coronavirus-related distribution ratably over a three-year period and allows individuals to repay that amount into the plan over the next three years (presumably filing for a tax deduction on the taxes they will have paid as a result of the premature distribution). Those repayments would not be subject to the retirement plan contribution limits.

Additionally, CRDs are not treated as eligible rollover distributions for purposes of the withholding rules under IRC 3405 and, therefore, are not subject to mandatory 20% federal withholding. Rather, they are subject to a default withholding rate of 10% unless elected otherwise by the participant.

Plan sponsors are not required to adopt the CRD—it’s optional.

2. Plan Loans (Section 2202)

In short: Doubles the current retirement plan loan limit.

H.R. 748 means participants will be able to borrow more money: the lesser of $100,000 or 100% of the participant’s vested account balance in the plan. A qualifying loan applies to loans taken within 180 days of the enactment (March 27, 2020) of the bill. Individuals with an outstanding loan from their plan with a repayment due from the date of enactment of the CARES Act through Dec. 31, 2020, can delay their loan repayment(s) for up to one year. Plan sponsors are not required to adopt this—it’s optional.

3. Required Minimum Distributions Postponed for 2020 (Section 2203)

In short: RMDs not required this calendar year.

In calendar year 2020, individuals age 72 or older, i.e., who were required to take RMDs for DC plans, including 401(k), 403(b), 457(b) and IRA plans, will not have to take RMDs. Under current law, individuals generally at age 72 (increased from age 70 ½ when the SECURE Act passed) must take an RMD from their DC plans and IRAs. The legislation also includes special rules regarding the waiver period to, in essence, hold harmless those individuals (and plans) who took advantage of the RMD waiver for 2020.

RMDs are calculated based on the Dec. 31st balance of the previous year (likely when most plan holders’ accounts were much higher than today’s balance).

Designated beneficiaries who inherited certain retirement accounts (401(k)s, IRAs, etc.) also benefit from the waiver—their minimum 2020 distributions are suspended.

If you already took the 2020 RMD, you have 60 days to rollover the funds, i.e., redeposit them in your 401(k), provided it’s not the case that you’re a beneficiary who took the RMD from an inherited retirement plan.

4. Plan Amendments (Section 2202)

In short: Amend your plan now (or later).

For plans that want to adopt provisions outlined in the CARES Act: A retirement plan can adopt the CARES Act 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 Jan. 1st, 2022, or later if prescribed by the Treasury Secretary. 

5. ERISA Filing (Section X)

In short: Postponed ERISA filing deadline.

Retirement plan sponsors may also see relief, as the act authorizes the Department of Labor to postpone certain filing deadlines of the Employee Retirement Income Security Act of 1974 (ERISA) for up to a year because of a public health emergency.

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers.

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