The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020, includes a number of provisions that affect retirement plan sponsors and participants. These provisions are designed to provide relief to participants and employers facing financial difficulty as a result of the coronavirus pandemic.
The CARES Act permits a new type of distribution from eligible retirement plans (a “coronavirus-related distribution”), liberalizes plan loan requirements, and waives required minimum distributions from defined contribution retirement plans and IRAs for 2020. The Act also provides relief to defined benefit plan sponsors, many of whom are facing cash-flow issues as a result of the pandemic and related economic slow-down. In addition, the CARES Act provides a limited window for employers to assist with student loan debt and makes certain changes affecting group health plans.
The CARES Act creates a new coronavirus-related distribution that may be made from qualified retirement plans (e.g., 401(k) and profit sharing plans), 403(b) plans, governmental 457(b) plans and IRAs. These distributions are available to an individual:
- who has been diagnosed with COVID-19 or with the virus SARS-CoV-2 by a test approved by the Centers for Disease Control and Prevention;
- whose spouse or dependent is so diagnosed; or
- who experiences adverse financial consequences as a result of (i) being quarantined, furloughed, or laid off, or having work hours reduced due to such disease or virus; (ii) being unable to work due to lack of child care due to such disease or virus; or (iii) closing or reducing hours of a business owned or operated by the individual due to such disease or virus.
Plan administrators may rely on a certification from the participant that he or she meets one of these criteria.
Coronavirus-related distributions may be made only during 2020 and the aggregate amount of such distributions received by an individual may not exceed $100,000. Coronavirus-related distributions are not subject to the 10 percent early distribution tax that would otherwise generally apply to distributions made prior to age 59-½. For withholding purposes, the distributions are not treated as eligible rollover distributions, so mandatory 20 percent federal income tax withholding does not apply. Instead, coronavirus-related distributions will be subject to 10 percent federal income tax withholding.
In general, the amount of any coronavirus-related distribution that is required to be included in gross income will be included ratably over a three-year period beginning with 2020 (unless the individual elects to include such amount in gross income for 2020).
A coronavirus-related distribution may be repaid to an eligible retirement plan within three years after the date on which the distribution was received.
Changes to plan loan requirements
The CARES Act temporarily increases the maximum amount a participant may borrow from qualified retirement plans and 403(b) plans for loans made during the 180-day period beginning on March 27, 2020, provided the participant is an individual described above as eligible for a coronavirus-related distribution (“qualified individual”).
The increased maximum amount, when added to the outstanding balance of all loans from the plan, is the lesser of (i) $100,000 (reduced by the excess, if any, of the highest outstanding loan balance from the plan during the one-year period ending on the day before the loan is made, over the outstanding loan balance from the plan on the date the loan is made), or (ii) the participant’s vested account balance.
The Act also provides for a one-year delay of the due date for any loan repayment that occurs between March 27, 2020 and December 31, 2020. This delay applies only to qualified individuals with an outstanding loan on or after March 27, 2020. Any subsequent repayments will be adjusted to reflect the delay in the due date and any interest accrued during the delay. If repayment is delayed, the period of the delay is disregarded in determining the term of the loan.
Waiver of required minimum distributions
The CARES Act waives required minimum distributions for 2020 from defined contribution qualified retirement plans, 403(b) plans, defined contribution 457(b) plans (except those maintained by tax-exempt entities), and IRAs. The waiver applies to required minimum distributions for 2019 for which the required beginning date is April 1, 2020 (and that were not already made in 2019) in addition to required minimum distributions for 2020.
The deadline for plan amendments relating to these changes is generally the last day of the first plan year beginning on or after January 1, 2022 (for calendar year plans, by December 31, 2022). The deadline for governmental plans is generally the last day of the first plan year beginning on or after January 1, 2024.
Defined benefit plan relief
The CARES Act allows sponsors of single-employer defined benefit plans to delay minimum required contributions due during calendar year 2020 until January 1, 2021. When delayed contributions are made, they must include interest accruing for the period between the original due date and the payment date at the effective rate of interest for the plan for the plan year that includes the payment date.
The Act also permits sponsors of single-employer defined benefits plans to elect to treat the plan’s adjusted funding target attainment percentage (“AFTAP”) for the last plan year ending before January 1, 2020, as the AFTAP for plan years which include calendar year 2020. This relief may help avoid funding-based restrictions on future benefit accruals and distributions made in an optional form in the event a plan’s funding status deteriorates due to poor market performance as a result of the coronavirus pandemic.
Group health plan changes
The CARES Act requires group health plans and health insurance issuers to cover medical care intended to prevent or mitigate COVID-19 within 15 business days after the date the item or service is recommended. In addition, the Act requires that health insurance plans provide coverage without imposing cost-sharing or prior authorization requirements for in vitro diagnostic products that meet certain specifications to detect COVID-19 or the virus SARS-CoV-2 for the remainder of the coronavirus pandemic. The Act also creates certain restrictions on the reimbursement rates that group health plans and health insurance issuers may use to reimburse providers for COVID-19 diagnostic tests.
The CARES Act also allows “telehealth and other remote care services” to be covered without participants in a health savings account (HSA)-qualified high-deductible health plan having to satisfy their plan deductible. Accordingly, group health plans can now offer free telehealth visits for any reason without the risk of participants becoming ineligible to make contributions to their HSAs. The CARES Act thus expands the guidance in IRS Notice 2020-15 that allowed HSA-qualified high-deductible health plans to cover the cost of testing and treatment of COVID-19 before satisfying the plan deductible. The provision is effective on March 27, 2020, and will be discontinued for plan years beginning on or after January 1, 2022.
Effective for expenses incurred on or after January 1, 2020, the CARES Act also allows consumers to use flexible spending account (FSA), health reimbursement arrangement (HRA), and HSA funds to purchase menstrual care products as “qualified health expenses.” This provision does not expire.
Employer assistance with student loans
In addition to suspending the repayment of federal student loans until September 30, 2020, the CARES Act allows employees to exclude from their income employer payments up to $5,250 toward the employee’s federal student loan debt. To be excluded from income, the employer paymentsmust be made before January 1, 2021.