COVID-19: CARES Act Provisions for Retirement Plan Sponsors and Participants
As employers struggle with the financial implications of the COVID-19 pandemic, many are looking into the possibility of suspending contributions to employee retirement plans that they manage. At the same time, employees who are struggling to make ends meet may be looking into making withdrawals or taking loans from their retirement accounts.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was signed into law on March 27, 2020, expanded access to retirement funds and relaxed some provisions to give financial relief to both employers and employees. This article reviews some of the leading provisions of the CARES Act as it relates to pension and retirement plans.
Plan Participant Early Withdrawals from Retirement Accounts
Generally, the Internal Revenue Code (IRC) imposes a 10% penalty on early withdrawals from retirement accounts. Early withdrawals are withdrawals before the retirement plan holder reaches the age of 59 ½, before death, or before they become disabled.
However, with the passage of the CARES Act, Section 2202, qualified individuals who have been affected by COVID-19 may be exempt from the 10% penalty on early withdrawals. Qualified individuals include the following.
• Individuals who have tested positive for COVID-19 or have a spouse or dependent who tested positive.
• Individuals with COVID-related financial difficulties due to quarantine, furlough, a reduction in work hours, or unemployment.
• Individuals who are financially affected due to a lack of childcare for school-aged children.
• Individuals who own a business that closed or cut back hours as a result of COVID-19.
Early withdrawals that may be exempt from the 10% penalty are amounts up to $100,000 that were taken from January 1, 2020, through December 31, 2020. For those qualified individuals whose early withdrawal does meet the 10% exemption under the CARES Act, these individuals must include the amount they withdrew in their taxable income. They may report the “income” either in the year it was received or equally over a three-year period. The amount withdrawn can be repaid either wholly or in-part to a qualified retirement plan within three years of receiving the withdrawal.
Retirement Plan Hardship Distributions and Loans under the CARES Act
Individuals who are not qualified to receive the 10% exemption on their withdrawal may instead be qualified to take a hardship distribution because of the federally declared disaster, COVID-19. An individual’s ability to claim a hardship distribution may vary based on whether the state the participant resides in qualifies for individual assistance under the disaster declaration and whether the participant’s retirement plan allows for such distributions.
Plan participants may also be able to take out a loan from their retirement account, depending on the type of retirement account they hold. The maximum loan amount has traditionally been the lesser of half of the participant’s vested account balance or $50,000. Loans typically must be repaid in level installments over five years, although the term of the loan may be longer if the loan is used to purchase or construct the participant’s principal residence.
General loan guidelines have been modified, however, with the passage of the CARES Act, Section 2203. The maximum loan amount has been increased to the lesser of the participant’s entire vested account balance or $100,000 for loans taken within 180 days of the CARES Act’s enactment. Furthermore, the due dates for new and existing loans have been extended. The due dates for payments due on or after the CARES Act’s enactment through December 31, 2020 are extended by one year with subsequent payments also delayed by one year.
Required Minimum Distributions (RMDs) are generally required to be taken by individuals by April 1 of the year following the year in which they turn 72 (or age 70 ½ for those who turned 70 ½ before January 1, 2020). However, with the passage of the CARES Act, Section 2203, RMDs have been suspended for the year 2020. The RMD suspension applies to individuals who took their first RMD January 1, 2020, to April 1, 2020.
CARES Act Implications for Plan Sponsors
Sponsors of single-employer pension plans are generally required to make an annual required contribution (ARC) to a plan. The required contribution is generally equal to the value of benefits earned by participants in the year, plus a share of any prior years’ plan underfunding. If plan sponsors fail to contribute they may receive an excise tax. However, with the passage of the CARES Act, Section 3608, sponsor contributions due in 2020 have been suspended and can be paid, with interest, on January 1, 2021. Section 3608 also allows plans to use the funding percentage for the 2019 plan year rather than the 2020 plan year in determining whether plans must impose benefit restrictions.
Private-sector pension plans also face a variety of deadlines and requirements imposed under ERISA. The Secretary of Labor has the authority to delay, for up to a year, any action required under ERISA in cases of a presidentially declared disaster or a terroristic or military action. With the passage of the CARES Act, Section 3607, the events that allow the Secretary of Labor to delay deadlines have been expanded. Deadlines are now allowed to be delayed if a public health emergency has been declared by the Secretary of Health and Human Services.
In response to the passage of the CARES Act, the Pension Benefit Guaranty Corporation (PBGC) announced they would be extending deadlines for upcoming premium payments and other filings with the agency. Due dates for filings and actions that would have been due on or after April 1, 2020, and before July 15, 2020, have been extended to July 15, 2020. This includes PBGC premiums, ERISA Section 4010 reports for underfunded plans, and the annual Form 5500. It is important to note that due dates for some particularly important or time-sensitive filings have not been extended.
Careful Planning is Required
ERISA and CARES Act rules can be very complicated and may vary depending on individual circumstances. Plan sponsors and plan participants will want to fully understand compliance requirements before taking any action.
Mark Johnson, Ph.D., J.D., is an experienced pension and ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances. He can be reached at 817-909-0778. ERISA Benefits Consulting, Inc. by Mark Johnson provides benefit consulting and advisory services and does not engage in the practice of law.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.