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Congress Passes CARES Act: What COVID-19 Relief Means for Retirement

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, the third in a series of packages put before Congress since the beginning of March, was enacted today to provide further financial relief and stimulus to businesses, families and individuals.

This bill also addresses defined benefit (DB) and defined contribution (DC) plans. DB plan sponsors will receive flexibility on funding obligations while DC plan participants will be given greater access to assets and distribution tax relief during this crisis. Here we will review the:

  • Definition of a coronavirus-related DC distribution
  • Dimensions of DC withdrawal and loan relief, including plan loans and required minimal distribution (RMD) details
  • Delay in DB funding obligations

Defining the Universe

To start, we’ll outline the conditions that make an individual eligible for a “coronavirus-related distribution,” as defined by the CARES Act.

1. Testing: Those individuals deemed eligible have been diagnosed with the virus SARS-CoV-2 or coronavirus disease 2019 (COVID-19) with a test approved by the Centers for Disease Control and Prevention. Additionally, individuals’ spouses or dependents who have been diagnosed with such a test are deemed eligible.Access to such tests remains an open question, per a March 20, 2020 joint statement by the Association of State and Territorial Health Officials, Association of Public Health Laboratories and Council of State and Territorial Epidemiologists citing a “widescale shortage of laboratory supplies and reagents” for COVID-19 testing. This leads us to the second definition.

2. Hardship: Eligible individuals are those who experience adverse financial consequences as a result of being quarantined, furloughed or laid off, or having work hours reduced. Included in these circumstances are people unable to work due to the lack of child care or the shuttering of their business. Additional impeding factors will also be considered by the Secretary of the Treasury or the Secretary’s delegate.

Employees will certify to their employers that they meet hardship conditions. It is understood that certification will be flexible in an effort to fit a range of individual situations that qualify as “adverse financial consequences.” For example, if an employee is laid off but receives severance, does that individual have an adverse financial consequence? Would any reduction in pay qualify as an adverse financial consequence? Would a loss of typical overtime qualify? For the individual, the answer varies. The IRS is not expected to challenge these decisions, unless an abuse of the certification is detected.

Dimensions of DC Distribution

For those individuals who meet the definition of eligibility, the bill provides tax relief for retirement plan and IRA coronavirus-related distributions taken on or after January 1, 2020 and before December 31, 2020.

Additional dates of note are the plan amendment deadlines for adopting relief provisions, no earlier than the last day of the first plan year beginning on or after January 1, 2022 (January 1, 2024 for governmental plans).

Here we will review three types of relief distributions:

1. Retirement plan and IRA distributions: The CARES Act permits in-service distributions, even if such amounts are not otherwise distributable from the plan under the Internal Revenue Code. These provisions will:

  • Provide an exception to the 10% early distribution penalty
  • Excuse withholding applicable to eligible rollover distributions
  • Permit the individual to include income attributable to the distribution over the three-year period beginning with the year the distribution would otherwise be taxable

Enable recontribution of the distribution to a plan or IRA within three years, in which case the recontribution is generally treated as a direct trustee-to-trustee transfer within 60 days of the distribution

Employers would be permitted, but not required, to make available distributions described above and accept any repayments. This special tax treatment would be limited to aggregate distributions of $100,000 per participant.

2. Plan loans: The CARES Act increases the maximum loan limit for qualified individuals to the lesser of: (1) $100,000 (from $50,000); or (2) the greater of $10,000 or 100% (from 50%) of the present value of the participant’s vested benefit.

This increased loan amount is available for loans made during the 180-day period beginning on the date of enactment. The bill also extends the due date of any qualified individual’s loan repayment that would otherwise be due during 2020 (but on or after the date of enactment) to one year after the otherwise applicable due date. For this purpose, a qualified individual is an individual who would qualify for a coronavirus-related distribution under the above conditions.

3. RMDs waived: RMDs are waived in 2020 for IRAs and all types of DC plans, including 401(k), 403(b) and governmental 457(b) plans. This also applies to RMDs due in 2020, but attributable to 2019.

Delay in DB Funding

Obligations Under the bill, all single-employer funding obligations due during 2020 are not required to be made until January 1, 2021, though interest will be charged for late payments. In addition, a sponsor may elect to apply the plan’s funded status for the 2019 plan year as applicable in determining the application of benefit restrictions for “plan years which include calendar year 2020.”

 In Closing

As a policy advocate, I have watched the gears of Capitol Hill grind slowly. However, I am buoyed by the bipartisan progress that has been made in Congress over these last few weeks of crisis. We are confronted with an unprecedented challenge that impacts every level of society. Specific to the retirement security of American workers and the necessary support for the organizations that administer and serve these plans, we believe the appropriate measures are being put in place. We at State Street continue to make ourselves available to plan sponsors and those who advise them, offering guidance on how to navigate and apply the CARES Act provisions.