CARES Act: Implications for Retirement Plans and Individual Retirement Accounts

The Coronavirus Aid, Relief, and Economic Security (CARES) Act (HR 748) was signed into law on March 27, 2020, providing support to individuals, businesses, and governments in response to COVID-19. The law includes several retirement plan and individual retirement account (IRA) provisions.

Some of these provisions are mandatory, while others are optional provisions or require employer adoption. An overview of the act’s retirement provisions follows.

Mandatory Provisions

Required Minimum Distributions Waived for 2020

Required minimum distributions (RMDs) from defined contribution plans—including 401(k) plans, 403(b) plans, governmental 457(b) plans, individual retirement annuities, and IRAs—due in 2020 are waived.

The waiver applies to:

  • IRA owners
  • Plan participants
  • All beneficiaries taking RMDs under the life expectancy rule

This waiver, however, doesn’t apply to defined benefit plans.

For beneficiaries required to the take distributions under the five-year rule, 2020 won’t be counted as part of the five-year period.

Optional Provisions

Coronavirus-Related Distributions

A new distribution from a plan or IRA called a coronavirus-related distribution (CRD) is now available to individuals affected by COVID-19.

The 10% penalty on early withdrawal of retirement funds won’t apply for any CRDs, up to $100,000 through December 31, 2020—total amount is aggregated per individual across tax-favored employer-sponsored plans and IRAs.

A CRD is a distribution made in 2020 from a qualified retirement plan—including a 401(k) plan, 403(b) plan, 457(b) plan, individual retirement account, or individual retirement annuity—to a qualified individual. A plan administrator may rely on an employee’s certification that the distribution is a CRD.

A CRD isn’t treated as an eligible rollover distribution and can’t be contributed as a rollover contribution to an individual retirement account or another employer retirement plan.

Qualified Individuals

A qualified individual is defined as an individual who’s either:

  • Diagnosed with SARS-CoV-2 virus or COVID-19 disease, or whose spouse or dependent has been diagnosed with SARS-CoV-2 virus or COVID-19 disease under a CDC-approved test
  • Experiencing adverse financial consequences from being quarantined, furloughed, laid off, having reduced work hours, unable to work due to lack of child care, or, in the case of a business owner, closing their business or experiencing reduced hours due to the virus

The CRD amounts are exempt from the early withdrawal penalty, but generally will be included in taxable income. However, the taxpayer can elect to spread the income inclusion ratably over a three-year period from 2020 through 2022. Alternatively, the individual can repay the distribution within three years of receipt to avoid income recognition.

Disaster Area Eligibility

It’s important to keep in mind that if a plan participant isn’t a qualified individual, they still could be eligible to receive a hardship distribution. This distribution would come from a retirement plan that permits hardship distributions on account of a federally-declared disaster to a plan participant who lives or works in a Federal Emergency Management Agency (FEMA) declared disaster area, in accordance with the safe harbor hardship distribution regulations.

FEMA has declared many states disaster areas as a result of the COVID-19 pandemic. A current list of locations declared disaster areas by FEMA can be found here.

Maximum Loan Increase

The CARES Act also allows for plan sponsors to raise the maximum loan for loans from tax-qualified retirement plans, including 401(k) plans and 403(b) plans to qualified individuals.

Prior to the CARES Act, most plans allowed for loans up to $50,000. Under the CARES Act, these loans could be increased from the lesser of $50,000 or 50% of the participant’s vested balance to the lesser of $100,000 or 100% of the participant’s vested balance. These loans can be taken for a period from March 27, 2020 until September 23, 2020. 

Participant Provision

Regardless of if an employer adopts the loan maximum loan increase provisions, a participant can choose to delay loan repayments on existing loans.

Under this provision, loan repayment due dates for qualified participants under qualified retirement plans and 403(b) plans occurring from the date of enactment of the CARES Act (March 27, 2020) through December 31, 2020 can be delayed for one year.

At the end of the one-year period, the loan balance and accrued interest should be re-amortized.

Defined Benefit Plan Provisions

Delayed Minimum Requirement Contributions

For those employers that sponsor defined benefit plans, and have minimum funding requirements, due dates for any minimum required contributions for a single-employer defined benefit plan due in 2020 have been delayed until January 1, 2021.

Each minimum required contribution that’s delayed will be increased to include interest accrued during the delay period at the effective rate of interest applying in the plan year of the original due date for the contribution.

This delayed due date applies to both quarterly contributions that are due on a date during 2020 and the annual contributions with a final due date that was originally scheduled for 2020.

Carry Forward of Funding Target

Defined benefit plans are subject to certain restrictions if they are or become underfunded for the year.

To make this determination, a plan’s actuary reports on the plan’s funded status and their report becomes the basis for those restrictions.

Under this provision, plan sponsors can elect to treat the plan’s adjusted funding target attainment percentage for the last plan year ending before January 1, 2020 as the adjusted funding target attainment percentage for plan years that include calendar year 2020.

Additional Provisions

Plan Amendments

Plans have until at least the end of the 2022 plan year, or later as the Department of Treasury can provide, to adopt the amendments related to the CARES Act.

Expanded Department of Labor Authority

The CARES Act amends Section 518 of the Employee Retirement Income Security Act (ERISA) to provide the Department of Labor (DOL) the ability to postpone certain ERISA filing deadlines for a period of up to one year in the case of a public health emergency.

This applies to both retirement and health plans. The DOL could potentially extend the time for filing documents, such as the annual return on Form 5500. At the time of this release, the DOL hasn’t yet granted any filing extensions.

We’re Here to Help

To learn more about the CARES Act’s impact to retirement plans, IRAs, and how other provisions can help you or your business, contact your Moss Adams professional.

Note on COVID-19

During this unparalleled time, we’re closely monitoring the COVID-19 situation as it evolves so we can provide up-to-date guidance and support to help you combat uncertainty. For regulatory updates, strategies to help cope with subsequent risk, and possible steps to bolster your workforce and organization, please see the following resources: