Retirement Plan Provisions and Employer Decisions
The recently passed Coronavirus Aid, Relief, and Economic Security Act (CARES Act) contains provisions for relief to businesses and their employees during the current crisis. Among those provisions are temporary relief to businesses obligated to fund pension plans, and potentially greater access to funds held in pension plans for employees affected by COVID-19. While we have no guidance as of yet, these do not appear to be requirements, and in some circumstances businesses will have to elect to allow their employees to take advantage of these provisions.
Generally, funds held in retirement plans and IRAs are subject to a 10% penalty if they are withdrawn before retirement age (usually age 59 ½). However, Congress has temporarily waived the 10% penalty for coronavirus related distributions (CRDs). CRDs are defined as:
- distributions of not more than $100,000 from a qualified retirement plan or IRA;
- made in calendar year 2020; and
- made to a person negatively impacted by COVID-19.
In turn, a person negatively impacted by COVID-19 is an individual:
- who is diagnosed with by COVID-19 pursuant to a test approved by the Centers for Disease Control;
- whose spouse or dependents are diagnosed with COVID-19 pursuant to a test approved by the Centers for Disease Control; or
- who experiences negative financial consequences because they are unable to work due to quarantine, furlough or reduction in work due to the virus, a business closure or the inability to find child care allowing them to work.
An employer may rely on the certification of the employee that they are negatively impacted by COVID-19 in making such distributions.
These distributions do not escape income tax, but they are taxed ratably, at the election of the employee, over the three years beginning in 2021. In addition, no withholding is made with respect to a CRD. Normally, distributions are subject to a 20% withholding.
Finally, an employee taking a CRD has the option of paying the distribution back to the plan over the three years following the distribution. In so doing, the employee is treated as having taken an eligible rollover distribution and rolled over the distribution within the applicable period to avoid tax.
The act also increases the amount that an employee can borrow from a qualified plan to the greater of: $100,000 (up from $50,000) and the amount of the employee’s balance in the plan (up from half of the employee’s balance).
For those with outstanding loans with a due date for any repayment in 2020, the due date will be extended for one year and repayments will be adjusted for accrued interest. That one-year period will not count against the five year limit for these loans.
Much like the increase in permissible distributions, these temporary rules only apply to individuals impacted by COVID-19.
These rules regarding distributions and loans do not appear to be mandatory. Thus, if an employer maintains a plan that does not allow for loans, they will need to amend the plan to do so. If they do not allow for early distributions, they also will need to amend. In either event, plans will need to be amended to increase the limits to comport with the terms of the CARES Act.
To apply these rules, qualified plans ultimately will need to be amended not later than the end of the plan year beginning on or after January 1, 2022. For most plans, that will mean the amendment is due by December 31, 2022. Most importantly, employers who wish to amend their plans will need to immediately operate their plans in accordance with these temporary rules. Thus, employers do have a decision to make if they wish to offer these benefits to their employees, and if they do, they will need to operate in accordance with the CARES Act even though their plans may not be amended for several years to reflect the CARES Act.
Required Minimum Distributions
As the federal government has done in response to past crises, most recently in 2009, it has waived required minimum distributions (RMD) from plans to employees required to take a distribution or commence distributions in 2020. This waiver does not apply to distributions made prior to January 1, 2020. Note that if a distribution is taken in lieu of an RMD, it will not be treated as an eligible roll over.
The act also allows employers who have minimum funding payments under defined benefit plans due in 2020 to delay those payments until January 1, 2021. The employer will be required to pay interest on the delayed contribution. Those employers can also elect to use as the plan’s adjusted funding target attainment percentage that percentage for the last plan year ending before January 1, 2020.
Finally, the act granted the Department of Labor (DOL) the right to postpone deadlines by adding public health emergency to terrorist attacks and military action, which already provide the Department with authority to delay deadlines. It does not appear the DOL has yet to extend any deadlines, although those extensions will likely be forthcoming.
To the extent that any of these provisions may apply to you, please reach out to our employee benefit attorneys for assistance on these or any other matters.
For more information on the effect of the CARES Act as it relates to individuals, please see the article by Kristina L. M. Wildman.
At the date of publication the above information was correct. It is quite possible the information above has changed as COVID-19 is a rapidly evolving situation.
The article in this publication has been prepared by Eastman & Smith Ltd. for informational purposes only and should not be considered legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney/client relationship.