ALERT: CARES Act: New options for retirement plan participants

April 3, 2020

The Act provides new benefits to retirement plan participants that meet COVID-19 eligibility requirements.

On March 27, 2020, the President signed into law the Coronavirus Aid, Relief and Economic Security Act (CARES Act) to help with economic issues resulting from the COVID-19 outbreak. This article addresses some of the key items that pertain to Defined Contribution Plans (plans), including 401(k), Profit Sharing and Money Purchase. This information is subject to change based on future guidance provided by federal agencies.

The first item included in the Act is that plans must adopt each individual benefit as they see appropriate for their plan and circumstances. While the ability to request and process any of these options is available as of March 27, 2020, plans must be amended no later than the last day of the first plan year beginning on or after January 1, 2022. For those with calendar plan years, this date is December 31, 2022.

Eligibility requirements

The CARES Act provides new benefits to participants that meet one or more of the following eligibility requirements:

  • The participant has been diagnosed with COVID-19.
  • The participant’s spouse or dependent has been diagnosed with COVID-19.
  • The participant has experienced adverse financial consequences due to:
    • being quarantined, furloughed or laid off;
    • experiencing a reduction in work hours;
    • being unable to work due to lack of childcare (caused by COVID-19);
    • closing or reducing hours of business owned or operated by the participant; or
    • other factors determined by the Treasury Secretary.

The Plan Sponsor may rely on certification by the participant for eligibility.

New plan provisions

Each of the following provisions may be elected individually or in any combination. There is no requirement to adopt any or all of these. Your employee situation should be used to determine which options to elect. There is also no requirement on when to adopt these in practice other than prior to any transaction. These do not apply to everyone in your plan as a blanket amendment; only to those participants that meet the COVID-19 eligibility requirements.

  • In-service/hardship provision
    • This allows for a distribution of up to $100,000 (of the participant’s vested balance) from a retirement plan or IRA on or after January 1, 2020 through December 31, 2020.
    • If this is elected, the benefit is not subject to the normal 10% tax on early withdrawals.
    • The individual is able to pay this distribution back, making it a tax-free distribution, within three years.
    • This payback is not subject to the annual contribution limits.
    • If there is an amount not paid back at the end of the third year, the amount becomes taxable.
  • New plan loans
    • The current loan limit is doubled to $100,000 or 100% of the vested account balance, whichever is less.
    • The loan must be made on or before September 23, 2020.
  • Existing plan loans
    • Loans with repayments due between March 27, 2020, and December 31, 2020, may delay repayment for up to one year.
    • Interest will continue to accrue on the loan(s).
    • If the loan was for a term of five years, it appears the loan can be extended beyond its original five-year period, but additional guidance is necessary to clarify.

Required Minimum Distribution rule change for 2020

For the calendar year 2020, there is a temporary waiver of the required minimum distribution (RMD) rules.

  • The RMD rule changed from 70½ to 72 years of age for 2020.
  • This waiver applies to anyone receiving or due to receive a RMD in 2020.

Other items to consider

The following are other items to consider during this time, but not related to the CARES Act:

  • Discontinuing safe harbor match or profit-sharing contributions
    • This is generally allowable with amendment of the plan document and notice to participants.
    • We recommend you consult with your ERISA counsel before proceeding.
  • Partial plan termination
    • There is a 20% rule of thumb on the number of employees terminated before a partial termination occurs.
    • While it is a rule of thumb, the IRS considers specific facts and circumstances be taken into account.
    • A partial termination requires 100% vesting of those participants being terminated.
    • It is important to keep track of the number of terminations taking place during this time.
  • Plan termination
    • Plans may be terminated, but certain requirements must be followed.
    • Everyone in the plan will become 100% vested upon termination.
    • Plan resolution will need to be drafted by your ERISA attorney.
    • The plan will need to be brought current for all document changes as mandated by the IRS.
    • It is generally recommended the plan request a determination letter for termination.
    • We recommend you consult with your ERISA counsel before proceeding.

For more information

If you have additional questions regarding this or any topic regarding your retirement plan, please reach out to your AGH Employee Benefit Services professional, or contact Brad Bechtel using his information below.

Brad Bechtel

Senior Vice President
Employee Benefit Services

Brad Bechtel leads AGH’s employee benefit services (EBS) division, which serves clients nationwide. EBS is one of the region's largest providers of retirement plan recordkeeping services for daily valuation plans. The division provides consulting services to clients on employee benefit plans, including plan design, implementation, operation, fiduciary due diligence, compliance, and through affiliate AGH Wealth Management, discretionary and non-discretionary investment fiduciary services, investment advisory services and employee education.

Brad is experienced in executive compensation, including non-qualified, phantom stock, top hat and excess benefit plans, as well as other deferred compensation approaches. He has consulted for numerous Fortune 500 corporations on investment management and fiduciary due diligence. He also provides search and selection due diligence consulting services for companies seeking new investment and recordkeeping providers for their qualified plans. Brad is a registered investment advisor who holds Series 7, 24 and 66 FINRA registrations, and he is a member of the American Society of Pension Professionals & Actuaries.

Information in this document has been obtained by Allen, Gibbs & Houlik, L.C. from sources believed to be reliable. However, AGH does not guarantee the accuracy nor completeness of any information. This communication does not and is not intended to provide legal, accounting or other professional advice or opinions on specific facts or matters, and accordingly, AGH assumes no liability whatsoever in connection with its use. Nothing in this communication can be used to avoid penalties that may be imposed by a governmental taxing authority or agency.

Are you adjusting to the new normal?
Our playbook can help you weather the uncertainty.