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The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), signed into law by President Trump on March 27, provides important relief for participants in tax-qualified retirement plans and IRA owners, as well as flexibility for employer contributions.
Required Minimum Distributions From Defined Contribution Plans and IRAs Waived for 2020
The CARES Act waives required minimum distributions (RMDs) from defined contribution plans and IRAs that are otherwise required in 2020, including RMDs based on an April 1, 2020 required beginning date. This will allow participants and IRA owners to avoid 2020 RMDs (which would have been calculated based on December 31, 2019 account values) now that most participants’ accounts have a lower value due to COVID-19’s impact on the financial markets.
In addition, the five-year period and 10-year period, as applicable, for death-benefit RMDs will be determined without regard to 2020. This essentially allows an extra year for these RMDs.
Withdrawals and Distributions for Participants Impacted by the Coronavirus
In addition to providing hardship withdrawals under existing rules, employers can adopt the CARES Act provisions for coronavirus-related distributions from 401(k), 403(b) and governmental 457(b) plans:
A participant is eligible for a coronavirus-related distribution if (1) the participant or the participant’s spouse or dependent is diagnosed with SARS-CoV-2 or COVID-19 by a CDC-approved test or (2) the participant experiences adverse financial consequences due to a coronavirus-related impact on employment. Employers may rely on a participant’s self-certification of eligibility.
Coronavirus-related distributions must be made between January 1, 2020 and December 31, 2020 and cannot exceed $100,000.
Coronavirus-related distributions will not be subject to the 10 percent tax that is otherwise applicable to distributions before a participant attains age 59.5.
Participants can elect to recognize income on coronavirus-related distributions over a three-year period.
Participants can contribute an amount up to the amount of any coronavirus-related distributions as a rollover contribution to an eligible plan or IRA within three years of the distribution. This will allow participants to essentially recontribute coronavirus-related distributions.
Employers can implement coronavirus-related distribution provisions immediately and adopt the necessary amendment later (with retroactive effect). Coronavirus-related distributions can be provided for active and inactive participants. Similar rules apply for coronavirus-related distributions from IRAs.
Increased Limits and Delayed Repayments for 401(k) Plan Loans During the Coronavirus Crisis
For participants who (1) are diagnosed, or whose spouse or dependent are diagnosed, with SARS-CoV-2 or COVID-19 by a CDC-approved test or (2) experience adverse financial consequences due to a coronavirus-related impact on employment, the CARES Act:
increases the 401(k) loan limit to the lesser of $100,000 or 100 percent of the participant’s vested account balance (instead of $50,000 or 50 percent of the participant’s vested account balance under existing rules) for loans issued within 180 days after March 27, 2020, and
delays for one year the due date of any loan repayment otherwise due between March 27, 2020 and December 31, 2020 for any 401(k) loan outstanding on or after the CARES Act enactment date.
As with coronavirus-related distributions, employers can rely on a participant’s self-certification of eligibility. Also, employers can implement the coronavirus-related loan limits immediately, and adopt any necessary plan or loan procedure amendments later (with retroactive effect).
Flexibility for Employer Minimum Funding Contributions to Single-Employer Defined Benefit Pension Plans
The CARES Act allows employers to delay required contributions to single-employer defined benefit pension plans otherwise due in calendar year 2020, provided that the delayed payments are made with interest by January 1, 2021.
Also, employers may elect to treat the adjusted funding target attainment percentage (AFTAP) for the last plan year ending before January 1, 2020 as the AFTAP for plan years that include calendar year 2020. This may be advantageous because the AFTAP for the 2020 plan year may otherwise limit certain lump-sum payments and benefit accruals due to declines in a plan’s funded status following COVID-19’s impact on the financial markets.
Flexibility for Employer 401(k) Contributions, but Not for Refunds of 2019 Excess Elective 401(k) Deferrals
IRS Notice 2020-18, issued on March 18, extends the due date for federal tax returns and tax payments otherwise due on April 15, 2020 to July 15, 2020. This also extends the due date for employer 401(k) contributions in order to qualify for a deduction. (Note: This extension is not applicable to employee contributions.)
Although the IRS has extended the federal income tax return filing date for individuals from April 15, 2020 to July 15, 2020, plans must still refund any 2019 excess elective 401(k) deferrals by April 15.
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.