Defined contribution plan provisions in COVID-19 relief legislation – The CARES Act

Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020, providing a $2 trillion stimulus package in response to the coronavirus pandemic and the economic crisis it generated. The rescue package is the largest in history, amounting to roughly 10% of annual U.S. gross domestic product (GDP). It provides direct checks and income support for individuals, loans to large corporations and small businesses, as well as funding for healthcare systems to combat the virus, among other things. There are a few provisions in the CARES Act that affect DC plan sponsors:

• Waiver of the 10% early withdrawal fee for “coronavirus-related distributions” up to $100,000
• Additional flexibility for plan loans for COVID-19 relief
• Waiver of the RMD (required minimum distribution) rules for DC plans in calendar year 2020

Waiver of the 10% early withdrawal fee for “coronavirus-related distributions” up to $100,000

The CARES Act waives the 10% early distribution penalty for “coronavirus-related distributions” of up to $100,000 from tax qualified plans.

The “coronavirus-related distribution” provision is optional for plan sponsors. We anticipate many plan sponsors will allow participants to access their retirement funds given the extremely negative impacts of COVID-19, but you should be aware that this provision is not mandatory and you should check the plan documents to ensure this type of distribution is allowed. As a practical rule, some recordkeepers are automatically making coronavirus-related distributions available in retirement plans unless the plan sponsor opts out by a certain date.

Participants taking these distributions may repay them, or contribute them as a “trust-to-trust” transfer to another plan, within three years of the distribution. 

Any amount of the distribution required to be included in gross income (for income tax purposes) may be spread over a three-year period.

For purposes of this rule, a “coronavirus-related distribution” means any distribution from a tax-qualified retirement plan made on or after January 1, 2020, and before December 31, 2020, to an individual:

1. Who is diagnosed with a disease designated as coronavirus by a test approved by the Centers for Disease Control and Prevention;
2. Whose spouse or dependent is so diagnosed; or
3. Who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to the coronavirus, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.

For this purpose, the plan administrator may rely on an employee certification to determine whether the distribution is a coronavirus-related distribution.

Since plan sponsors may voluntarily decide to adopt the coronavirus-related distribution provisions of the Act, they will need to decide, along with their plan service providers, whether their plans can administer the new distributions.

It is important to note that, while the CARES Act created a new tax-favored withdrawal from retirement plans, it does not modify the IRS criteria for hardship withdrawals. The IRS added “Federal Emergency Management Agency (FEMA)-Declared Disasters” as a new hardship withdrawal category in 2019, however, the national emergency declaration from President Trump on March 13, 2020 does not satisfy the IRS requirements of a FEMA-declared disaster. As of this writing, there are FEMA-declared disasters in some states, but not nationwide.

CARES Act distributions are actually more favorable than hardship withdrawals—including FEMA-declared disaster hardships—because of the extended three-year period granted for repayment and income tax payments.

Additional flexibility for plan loans for COVID-19 relief

The CARES Act modifies plan loans to qualified individuals—those who would be eligible for a “coronavirus-related distribution” as defined above—in two ways.

1. The bill temporarily increases the dollar limit on plan loans from $50,000 to $100,000 and the percentage limit from 50% to 100% of the present value of the participant’s account for 180 days from the date of enactment.

These provisions will require plan sponsors to update their loan procedures and communicate the updated loan flexibility to participants.

Waiver of the RMD rules for DC plans in calendar year 2020

The required minimum distribution (RMD) rules are generally waived for calendar year 2020 for defined contribution plans and IRAs, including for participants who reached eligibility in 2019 and have not yet received their distribution. Historically, individuals had to take their first RMD by April 1 of the year they turned 70½.The SECURE Act raised the age for RMDs from 70½ to 72, however, individuals who turned 70½ in 2019 would still have needed to take their RMD this April. Since the taxable amount of the RMD is calculated off the prior year-end account balance, when the Dow Jones Industrial Average Index was around 28,000, retirees could potentially be faced with higher withdrawal amounts and tax consequences, because 2019 year-end balances have likely now diminished due to the recent market sell-off.

The RMD suspension provisions in the CARES Act are similar to the RMD suspension that occurred in the wake of the Global Financial Crisis in 2008 so administration shouldn’t present a major issue for plan sponsors or providers.

In conclusion, the CARES Act is a very broad-based relief package that includes provisions that impact defined contribution retirement plans. The CARES Act provides much-needed financial support to individuals impacted by COVID-19, by allowing access to retirement funds and potential tax benefits associated with deferring RMDs in 2020.

For information on the CARES Act’s impact on DB plans, click here.