It CARES Act and Defined Contribution Plans: A Brief Summary for Plan Sponsors

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As the COVID-19 pandemic continues to impact our society, we are seeing employers grapple with furloughs, reductions in force and other alternatives, which are discussed in this Legal Alert. After some negotiations, Congress recently enacted a stimulus bill, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) that, among other relief, gives participants greater access to retirement savings.

Hardship Distributions without 10% Penalty

The CARES Act expands the availability of hardship distributions from qualified retirement plans by waiving the 10% early withdrawal penalty on distributions of up to $100,000 for a coronavirus-related distribution (“CRD”) between now and December 31, 2020.

A CRD is available for a participant who:

  • is diagnosed with COVID-19 by a test approved by the Centers for Disease Controls and Prevention (the “CDC”);
  • whose spouse or dependent is diagnosed with COVID-19 by a CDC approved test;
  • who experiences adverse financial consequences as a result of:
    • being quarantined, furloughed, laid off or having work hours reduced due to COVID-19;
    • being unable to work due to lack of child care due to COVID-19 or closing or reducing hours of a business owned or operated by the individual due to COVID-19; or
    • other factors as determined by the Secretary of the Treasury.

Under the CARES Act, a plan administrator may rely on an employee’s certification that the employee meets one of the requirements above to be eligible for a CRD.

Typically, hardship distributions are includible in income in the year in which the participant receives the hardship distribution. CRDs, however, are includible in income ratably over a three-year period, unless the participant elects to include such amounts earlier.

Finally, the participant may repay all or a portion of the CRD for a period of up to three years from the date on which the participant received the distribution.

Relief for Plan Loan Repayment

In addition to hardship distributions, the CARES Act increases retirement plan loan limits and provides for a one year delay on repaying certain existing plan loans for CRD eligible participants described above.

Generally, a participant may only receive a loan from a qualified retirement plan equal to the lesser of (1) $50,000 or (2) 50% of the vested account balance. For a period of 180 days following the enactment of the CARES Act, the plan loan limits have been increased to the lesser of (1) $100,000 or (2) 100% of the vested account balance.

A CRD eligible participant who has an outstanding qualified plan loan with a due date between now and December 31, 2020 may delay the repayment for one year. This one year delay is disregarded for purposes of complying with the Code’s maximum five-year plan loan limit. Any subsequent repayments shall be adjusted to reflect the due date delay and any interest accruing on such delay.

Waiver of 2020 Required Minimum Distributions

The CARES Act also waives 2020 required minimum distributions for defined contribution plans, including Section 403(b) and Section 457(b) plans and individual retirement accounts (“IRAs”). The relief does not apply to defined benefit plans. The waiver of required minimum distributions applies to any distribution that is required to be made in calendar year 2020 and it also applies to anyone who turned age 70½ in 2019 and has not yet received their 2019 required minimum distribution. This relief is similar to the relief provided in 2009, following the 2008 financial crisis.

Plan Amendment Deadlines

Plan sponsors have until at least the last day of the first plan year beginning on or after January 1, 2022 (i.e., December 31, 2022 for calendar year plans) to amend their plans to implement the relief provided by the CARES Act.

Other Provisions of the CARES Act

In addition to these defined contribution plan provisions, the 883 page CARES Act includes provisions relating to single employer defined benefit plan funding relief, health and welfare plan changes, limitations on compensation for executives that receive loans under the CARES Act and restrictions on labor and employment policies for those companies seeking financial relief under the CARES Act.

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