As you probably heard, on March 27, the U.S. House of Representatives passed the Coronavirus Aid, Relief and Economic Security (CARES) Act. What you may not know is the act contains several provisions related to retirement plans, with the intention of providing additional assistance to both plan sponsors and participants.
Hardship Distributions
10 percent early withdrawal penalty is waived on withdrawals up to $100,000 from a retirement plan or IRA for a person who is diagnosed with COVID-19, whose spouse or dependent is diagnosed with COVID-19, who experiences adverse financial consequences (laid off, work hours reduced, business closed, etc.) due to COVID-19. Also, the tax due on the distribution may be paid over three years, and the participant may repay the amount withdrawn over the next three years.
Plan Loans
Loan limits are increased from 50 percent of the vested account balance up to $50,000, to 100 percent of the vested account balance up to $100,000. Participants with an outstanding loan may delay loan payments for up to one year without causing the loan to go into default. The participant must meet the same criteria as above for hardship distributions to be eligible for loan relief.
Plan Amendments
Plan sponsors allowing for the above reliefs will have until the end of the 2022 plan year to amend plan documents. Note: You are not required to provide these reliefs. For example, if your plan currently does not allow loans, you do not have to allow for the increased loan amounts.
Required Minimum Distributions
Waived for 2020 for retirement plans and IRAs.
Delay in Defined Benefit Pension Funding requirements
Funding obligations due during 2020 are not required to be made until Jan. 1, 2021, with interest for late payments.
The act also gives the Department of Labor (DOL) authority to extend deadlines; the DOL would need to act separately for this to apply.
The American Retirement Association (ARA), parent of the National Association of Plan Advisors (NAPA) of which I am a member, “continues to push for additional assistance, including defined contribution funding relief. The ARA has called on the Treasury Department to provide this relief to help employers facing significant financial burdens relating to the Coronavirus, especially for retirement plans sponsored by small businesses.” So, we do not yet have this relief but it is being discussed.
We will rely on our TPA and recordkeeper partners to provide guidance on processes and procedures to allow for these reliefs. While we don’t want to encourage participants to raid their retirement savings, we understand there may be some who have no other choice. Please reach out to one of us if you have a participant requesting funds under these circumstances. Stay safe and I will keep you updated on any additional issues.
Those with questions should direct them to Saling Simms Associates, 7965 N. High St., Columbus, OH 43235, telephone: (614) 841-1881.