Understanding the Retirement Plan Provisions of the Federal CARES Act

By: Joe Dillon, CFP®
3 Minute Read

We recently summarized the key takeaways of the $2.1 Trillion “Coronavirus Aid, Relief, and Economic Security Act’’ or the ‘‘CARES Act’’ for small businesses and individuals. The following article is the second installment in our initial three-part series about the act and is focused on the implications for company retirement plans and plan participants.

Here is a high-level summary:

Hardship Distributions

The CARES Act waives the 10 percent early withdrawal penalty tax under Internal Revenue Code Section 72(t) on early withdrawals up to $100,000 from a retirement plan or IRA for an individual:

  • who is 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 these individuals to pay tax on the income from the distribution over a three-year period and allows them 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.

Plan Loans

H.R. 748 doubles the current retirement plan loan limits to the lesser of $100,000 or 100% of the participant’s vested account balance in the plan. 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 Amendments

The legislation further permits retirement plans to adopt these 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. 1, 2022, or later if prescribed by the Treasury Secretary.

Temporary Waiver of Required Minimum Distribution (RMD) Rules

H.R. 748 waives RMDs for calendar year 2020 for defined-contribution (DC) plans, including 401(k), 403(b), 457(b), and IRA plans, allowing individuals to keep funds in their retirement plans. Under current law, individuals generally at age 72 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.

Single-Employer Defined-Benefit (DB) Plan Funding Rules

Newer to the bill is a provision to provide single-employer DB plan funding relief by giving companies more time to meet their funding obligations—delaying the due date for any contribution otherwise due during 2020 until Jan. 1, 2021. At that time, contributions due earlier would be due with interest.

The provision also provides that a plan’s status for benefit restrictions as of Dec. 31, 2019, will apply throughout 2020. This means a plan sponsor may elect to treat the plan’s adjusted funding target attainment percentage for the last plan year—ending before Jan. 1, 2020—as the adjusted funding target attainment percentage for plan years, which include calendar year 2020.

Expansion of Department of Labor (DOL) Authority to Postpone Certain Deadlines

The legislation provides the DOL with expanded authority to postpone certain deadlines under ERISA. In general, the legislation increases the circumstances to go beyond a terroristic or military action to also include a public health emergency declared by the Secretary of Health and Human Services under the Public Health Service Act.

DC Funding Relief

Unfortunately, especially for medical practices that often use safe harbor contribution to ensure they pass ADP and ACT testing, DC (401(k)/profit sharing) funding relief did not make it into the bill. The American Retirement Association has requested that Plan Sponsors be allowed to suspend required contributions for 2020 and small employers (fewer than 500 employees) be allowed to suspend any 2019 required contributions already made. We’ll continue to monitor developments on this front.

Please reach out to the Curi Capital team at 984-202-2800 if you have any questions about this legislation and its implications for you, your practice, or your practice staff. We’ll continue to monitor and share related updates on the act as we know more. You can find our preliminary overview for small business and individuals here and our summary on Economic Injury Disaster Loans (EIDL) and Paycheck Protection Plan (PPP) Loans here.

Please note:  This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. You should consult your financial advisor, attorney, or tax advisor with regard to your individual situation.

Joe Dillon, CFP®

Joe Dillon is Curi Capital’s Managing Director of Retirement Plan Solutions, based in Raleigh, NC.

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