The Coronavirus Aid, Relief, and Economic Security (CARES) Act’s Impact on Retirement Plans

The Coronavirus Aid Relief, and Economic Security (CARES) Act includes several sections that impact retirement plans. These retirement plan changes are permitted, not mandatory. If plan sponsors decide to opt-out and not implement these changes, they should document that decision. Plan sponsors implementing some of these changes are required to amend the Plan no later than the last day of the plan year that begins on or after January 1, 2022 (e.g. December 31, 2022, for calendar year plans). Plan sponsors should contact their third-party service providers for guidance.

Section 2202
Special rules for use of retirement funds [(defined contribution 401(k), 401(a), 403(b)]

Applies to participants diagnosed with the virus SARS-CoV-2 or with COVID-19 (or if their spouse or dependent are diagnosed), or if they experience adverse financial consequences due to coronavirus-related situations (quarantined, terminated, furloughed, laid off, or reduced work hours). Plan administrators can rely on a participant’s certification that they satisfy the requirements.

• Tax-favored withdrawals from retirement plans (coronavirus-related distribution):
  • Applies to the period January 1, 2020, through December 31, 2020
  • Distributions are limited to $100,000
  • Distributions are exempt from the 10% early withdrawal penalty tax, and will not be subject to the mandatory 20% tax withholding
  • The taxable income can be included ratably over the three-taxable-year period beginning in 2020 instead of all in 2020 unless the participant opts out of this special income tax treatment
  • Distributions can be repaid over three years after the date of the distribution in one or more payments to an eligible retirement plan (treated as a rollover)

• Loans from qualified plans:
  • Increase in limit on loans not treated as distributions – lesser of $100,000 or 100% of the participant’s vested balance (was $50,000 or 50% of the participant’s vested balance). This applies for 180 days beginning on the date of the enactment of the Act (March 27, 2020).
  • Delay of repayment – loan repayment scheduled due dates during the period beginning on the date of the enactment of this Act and ending on December 31, 2020, will be delayed for one year. Interest will continue to accrue, and the loan will likely require re-amortization.

Section 2203
Temporary waiver of required minimum distribution rules – applicable to the 2020 calendar year [defined contribution 401(k), 401(a), 403(b)].

Section 3607
Expansion of Department of Labor (DOL) authority to postpone certain deadlines – expanded circumstances to include a public health emergency declared by the Secretary of Health and Human Services. The DOL is permitted to extend certain filing deadlines under ERISA by up to one year; refer to the DOL for guidance to come.

Section 3608
Single-employer plan funding rules (defined benefit pension plans):

• Delay in payment of minimum required contributions – payments originally due in 2020 are extended to January 1, 2021 (interest will accrue).
• Benefit restriction status – a plan sponsor may 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 may help avoid benefit restrictions.