On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Among its many and varied forms of relief, the CARES Act provides temporary relief for both plan participants and plan sponsors of certain retirement plans to help ease the burden of the coronavirus pandemic and the resulting economic uncertainty.
Availability of Coronavirus-Related Distributions
The CARES Act allows certain retirement plans to permit a plan participant to take a “coronavirus-related distribution” of up to $100,000 during the 2020 calendar year without incurring the 10% early distribution penalty. Coronavirus-related distributions are taxable as income to the participant (either in the year of distribution or spread out over three years) unless repaid during the three-year period following the distribution. Plans that can allow coronavirus-related distributions include qualified plans (such as 401(k) plans), IRAs, 403(b) plans, and governmental 457(b) plans.
A “coronavirus-related distribution” is a distribution made to an individual:
- Who is diagnosed with COVID-19 by an approved test;
- Whose spouse or dependent is diagnosed with COVID-19 by an approved test; or
- Who experiences adverse financial consequences as a result of one of the following:
- Being quarantined, furloughed, or laid off, or having work hours reduced due to the coronavirus,
- Being unable to work due to lack of child care due to the coronavirus,
- The closing or reducing of hours of a business owned or operated by the individual due to the coronavirus, or
- Other facts as may be determined by the Secretary of the Treasury.
The plan administrator may rely on an employee’s certification that the employee satisfies the above conditions in making a coronavirus-related distribution.
Expansion of Participant Loans
The CARES Act makes available plan loan relief to individuals who satisfy any of the three conditions listed above and who participate in plans that allow participant loans generally (nothing in the CARES Act requires that a qualified plan offer participant loans). For any plan loan made to such an individual during the 180-day period following enactment of the CARES Act, the maximum amount of such loan is increased to the lesser of (1) the present value of the nonforfeitable accrued benefit of the individual under the plan, or (2) $100,000.
In addition, if such an individual has a loan outstanding on or after the date of enactment, loan payments due between the enactment of the CARES Act and December 31, 2020, are delayed for one year. Any subsequent repayments must be adjusted to reflect the delay and any interest accrued.
Waiver of 2020 Required Minimum Distributions
The CARES Act waives required minimum distributions that otherwise would be required to be made during the 2020 calendar year from qualified plans (such as 401(k) plans), 403(b) plans, governmental 457(b) plans, and IRAs. The waiver appears to cover both required minimum distributions for 2020 as well as initial required minimum distributions for 2019 that are due by April 1, 2020, but were not made before January 1, 2020.
Retroactive Plan Amendments
Plan sponsors have until the last day of the first plan year beginning on or after January 1, 2022 (January 1, 2024 for governmental plans) to adopt a retroactive plan amendment incorporating the above changes. The plan must be operated in compliance with the new rules, to the extent adopted, prior to amendment.
Relief for Defined Benefit Plans
The CARES Act also provides two forms of relief for plan sponsors for defined benefit plans. First, the due dates for any minimum required contributions for single-employer defined benefit plans that would otherwise be required during the 2020 calendar year are extended to January 1, 2021. Minimum required contributions that are delayed until the extended due date must include interest accrued between the original due date and the payment date. Interest is calculated at the effective rate of interest for the plan year that includes the payment date.
Second, a plan sponsor of a single-employer defined benefit plan may choose to treat the plan’s adjusted funding target attainment percentage for the last plan year ending before January 1, 2020, as the adjusted funding target attainment percentage for the plan year that includes the 2020 calendar year.
Expansion of DOL Authority to Extend Certain Deadlines
Finally, the CARES Act amends the Employee Retirement Income Security Act of 1974, as amended (ERISA) to allow the U.S. Department of Labor (DOL) to extend ERISA-mandated deadlines up to one year due to a public health emergency declared by the Secretary of Health and Human Services.