The Coronavirus Aid Relief and Economic Security Act (CARES) was was designed to provide both businesses and individuals with several forms of economic relief, including an expansion of Economic Injury Disaster Loans (EIDLs), and the extremely popular Paycheck Protection Program (PPP), which the SBA announced had exhausted its $350-billion budget. Some provisions of the CARES act that have not received as much attention are those pertaining to the use of money in retirement plans, and employer contributions to employee retirement plans.
To help better understand these new rules, and how employees can take advantage of them, John Markley and Lisa Showalter from The Retirement Advantage gave a presentation which explained how these programs work, and some steps that employers should take now to establish their participation in or exemption from the various new programs in the CARES Act.
John and Lisa began with a quick preview of some of the additional measures that the American Retirement Association (ARA) was asking the government to provide to give relief to employers. These include suspension of required employer contributions for 2020, a waiver on 2019 employer contributions yet to be deposited, and other provisions which will prevent the termination of large numbers of employee retirement plans.
The most visible element of relief that the CARES Act offers in regard to retirement plans is the allowance for distributions of up to $100,000 (in aggregate) to be taken without early withdrawal penalties or the mandatory 20% withholding. Titled as coronavirus-related distributions, they require that the individual be experiencing financial strain related to the coronavirus or disruptions in commerce. The CARES Act also allows the tax burden from these distributions to be deferred for up to three years, and for plan holders to replace any funds taken as distributions without any caps on yearly contributions during that time.
These distributions are different from the traditional hardship withdrawals, which do not have the benefit of tax deferral, and the individual must meet FEMA disaster criteria to qualify. Whereas, distributions taken under the CARES Act allow plan holders to self-certify that they have been impacted by coronavirus. Plan holders can take multiple distributions without penalties through the end of 2020. The waiver on early withdrawal penalties applies to qualified distributions made after January 1, 2020, but it is unclear if penalties that have been paid will be refunded. Those who took distributions after January 1, which incurred an early withdrawal penalty, should consult with a retirement benefit professional to determine if they are entitled to a refund.
Not all businesses were disrupted, and businesses are not obligated to participate in these programs even if they were forced to cease operations temporarily. Businesses who want to allow these distributions should amend the language in their retirement plans to indicate the elements of the CARES Act that they will be adopting.
The CARES Act also allows for employees to take loans of up to $100,000 (or 100% of their vested account balance) until September 23 of 2020. As with the distributions, individuals can self-certify that they have been financially impacted by coronavirus. Loan repayments can be deferred up to 12 months. This provision also allows payments on any existing loan from a qualifying retirement plan to be deferred for up to 12 months.
Business owners are eligible to take out these type of loans as well. A retirement benefit professional should be consulted to make sure their plans allow loans to be taken from retirement plans, and amend plan language to allow them if it currently does not.
The CARES Act waives the requirement for plans to make Required Minimum Distributions (RMDs) through 2020. Normally minimum distributions must be taken by plan holders who are 72 years old or older. This new provision allows funds to be kept in retirement plans until the stock market has (hopefully) recovered, and distributions are not required to be taken when they are at extremely low values. Defined Benefit and Cash Balance plans are not included in the provision waiving RMDs. (Lisa added that anyone who has taken an RMD recently should consult with a retirement benefit professional to be apprised of updates from the IRS.)
Relief for employers is also offered. Single-employer funding obligations for Defined Benefit or Cash Balance plans due during 2020 can be deferred until January 1, 2021. Businesses can also use the last Adjusted Funding Target Attainment Percentage (AFTAP) for the plan year ending before January 1, 2020. This means that losses in the stock market in 2020 will not negatively affect the plan's rating, which could result in potential benefit restrictions.
The CARES Act extends the deadlines for certain notices, and businesses will want to consult with a retirement benefit professional to ensure that they are aware of any different deadlines. The ARA is requesting that the Department of Labor create a common deadline for all required notices to streamline plan administration.
The IRS extended the deadline in 2020 for filing and payment of Federal income taxes to July 15. Additional extensions were made for tax returns and payments due between April 1 and July 15, 2020, as well as on 2019 employer contributions to retirement plans, which are now due on July 15 of this year.
Restatements of 403(b) plans received a deadline extension from March 31 to June 30, and deadline for Defined Benefit and Cash Balance plan restatements has been extended from April 30 to July 31.
Plan sponsors do not need to amend their plans to start using the CARES Act relief provisions. Formal amendments are not due until the last day of the first plan year beginning on or after January 1, 2022. (January 1, 2024 for governmental plans.) Plan sponsors who do not want CARES Act relief provisions to be available in their plans will need to contact their plan vendor to ensure that they have opted out of the provisions, as many vendors are including CARES Act relief provisions in plans by default.
John and Lisa urged plan sponsors to contact their Third Party Administrator (TPA), as well as their recordkeeper to ensure their participation in any of the new provisions is correctly stated in their plan. Defined Benefit and Cash Balance plan sponsors are especially encouraged to seek professional guidance on how their plan should be funded through 2020.
This may be a good time for employers to review their retirement plan and make amendments that adopt or reject various CARES Act provisions, as well as allowing hardship withdrawals if their plans currently do not. Understanding these provisions is crucial to the health of any retirement plan, and sponsors should consider taking this opportunity to consult with a retirement benefit professional to make sure they have a thorough understanding of their current plan so they can tailor it to best serve their company and their employees.
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