Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) Provisions Affecting Retirement Plans
Revised April 1, 2020
What Plan Sponsors Need to Know
Defined Contribution Plans (401(k), Profit Sharing, 403(b), etc.)
- Tax-Favored Withdrawal/Distribution
- Plans may permit participants, including those under age 59½, to withdraw up to $100,000 from their account until December 31, 2020 without incurring the 10% penalty tax. The distribution must be taken for coronavirus-related purposes. Plan sponsors can accept and rely on self-certification from participants that the distribution is for a coronavirus-related purpose. The distribution is includible in a participant’s gross income; however, the amount of the distribution (although received in a lump sum) may be spread, for income recognition purposes, over three-tax years. The participant can re-contribute any part of the amount withdrawn back to the plan within three-tax years as a rollover contribution. Plan sponsors may adopt this provision, but it is not mandatory.
- Participant Loan Limits (for plans that permit participant loans)
- Participants may, for a limited time, borrow from their account up to the lesser of $100,000 or 100% of their account balance (an increase from the lesser of $50,000 or 50% of their account balance) subject to the ability of a plan account to accommodate the increased loan amount. Plan sponsors may adopt this provision, but it is not mandatory.
- Participant Loan Repayment Delay (for plans that permit participant loans)
- For a participant with a loan outstanding on March 27, 2020 (and for any new loans made through year-end 2020), loan repayments are delayed one year. When loan repayments are restarted, any delayed repayments must still be amortized over a five-year period (disregarding the one-year delay). Repayments will be adjusted to reflect the one-year delay and will include any interest accrued during the delay. The delay in loan repayments is required regardless of whether the plan sponsor adopts the permitted increase in loan limits described above.
Single-Employer Defined Benefit Pension Plans (Traditional Pension Plans)
- Delay of Minimum Required Contributions
- Sponsors of single-employer defined benefit pension plans may defer any minimum required contributions due during plan year 2020 (including final quarterly contributions from 2019 due in 2020). All deferred contributions are due no later than January 1, 2021. Any contributions deferred are increased by interest accruing from the original 2020 due date through the January 2021 payment date determined using the plan’s effective interest rate.
- 2020 AFTAP
- A single-employer defined benefit pension plan may use its adjusted funding target attainment percentage (“AFTAP”) for the last plan year ending prior to January 1, 2020 as the AFTAP for the 2020 plan year.
Additional Items to Note
- Plan Amendments
- Plan sponsors who desire to adopt any of the above-referenced defined contribution plan provisions do not need to amend plan documents immediately to implement the provisions. Amendments must be made by the last day of the first plan year beginning on or after January 1, 2022 (for calendar year plans this will be December 31, 2022).
- Waiver of Required Minimum Distributions (RMDs)
- There is a temporary waiver for RMDs required to be made after January 1, 2020. NOTE: the SECURE Act recently increased the RMD age from 70 ½ to 72.
PLEASE NOTE THAT UPDATES TO PLAN ADMINISTRATIVE SYSTEMS WILL MOST LIKLEY BE REQUIRED TO ADMINISTER THE ADOPTION OF THE WITHDRAWAL AND PARTICPANT LOAN PROVISIONS. YOU SHOULD CHECK WITH YOUR VENDOR.
This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.
 The definition of eligible retirement plan for purposes of taking a coronavirus-related distribution may be read to include defined benefit plans. Defined Benefit plan sponsors should not proceed with adopting this provision until further guidance is provided by the IRS.
 The definition of a “coronavirus-related distribution” is very broad and includes experiencing adverse financial consequences as a result of actions related to the coronavirus.
 Prior outstanding participant loans (where the account balance is used as security for the loan) can limit the amount available under this provision.