Coronavirus Aid, Relief and Economic Security Act (the "CARES Act")
1. Coronavirus-Related Expansion of Plan Loan Rules. The CARES Act allows plans to increase the maximum dollar limit allowed for "eligible employees" under the IRC from $50,000 to $100,000 between March 27, 2020 and 180 days later, i.e., September 23, 2020. CARES Act § 2202(b)(1)(A). In addition, the CARES Act allows an individual to take a plan loan up to 100% of such individual's vested accrued benefit, whereas previously this was limited to 50%. CARES Act § 2202(b)(1)(B).
In addition, "eligible employees" with existing plan loans from a qualified employer plan that's due date is between March 27, 2020 and December 31, 2020, may be provided with a one year extension with the existing mandatory repayment period tolled for the duration of the one-year period, and with subsequent loan payments to be appropriately adjusted to reflect the one-year extension and any interest accruing during the one-year extension. CARES Act § 2202(b)(2).
An "eligible employee" for this purpose is an individual: (a) who is diagnosed with coronavirus; (b) whose spouse or dependent is diagnosed with coronavirus; or (c) who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off, having reduced hours, being unable to work due to lack of child care, closing or reduced hours of a business owned or operated by the participant or other factors determined by the Secretary of the Treasury. CARES Act §§ 2202(b)(3) & 2202(a)(4)(ii).
2. Coronavirus-Related Distributions Made in 2020. In an effort to provide liquidity to individuals during the COVID-19 pandemic, the CARES Act allows individuals to take penalty free in-service coronavirus-related distributions from their retirement accounts (including 401(k) and Roth deferrals) between January 1, 2020 and December 31, 2020, subject to the limitations discussed below. CARES Act § 2202(a). Under normal circumstances, such distributions prior to age 59 ½ would be subject to an early withdrawal penalty under IRC § 72(t) in addition to regular income withholding taxes. Distributions from IRAs are also eligible for the coronavirus-related distribution.
A coronavirus-related distribution for this purpose is a distribution from eligible retirement plans (qualified plans, 403(b) plans, eligible 457(b) plans or IRAs) up to $100,000 made between January 1, 2020 and December 31, 2020 to an individual: (a) diagnosed with coronavirus, (b) whose spouse or dependent is diagnosed with coronavirus or (c) who experiences adverse financial consequences as a result of being quarantined, furloughed or laid off, having reduced hours, unable to work due to child care, closing or reduced hours of a business owned or operated by the individual or other factors determined by the Secretary of the Treasury. CARES Act § 2202(a)(4)(A).
A plan administrator may rely on an individual's certification that the individual meets the eligibility requirements for a coronavirus-related distribution unless the administrator has actual knowledge to the contrary. CARES Act § 2202(a)(4)(B) and IRS Q&As on Coronavirus-Related Relief for Retirement Plans and IRAs (May 4, 2020) Q&A 11.
The CARES Act allows for the inclusion of the amount in income to be spread over three taxable years. CARES Act § 2202(a)(5). A coronavirus-related distribution is not subject to the IRC § 72(t) 10% additional tax on early distributions. CARES Act § 2202(a)(1). Coronavirus-related distributions are also exempt from the 20% tax withholding on eligible rollover distributions, but they would be subject to a 10% nonperiodic payment withholding. CARES Act § 2202(a)(6).
An individual who receives a coronavirus-related distribution from an eligible retirement plan (including an IRA) may repay the amount to an eligible retirement plan (or IRA) within three years of receiving the distribution (assuming the plan accepts rollover distributions). Such individual could make installments or a lump sum repayments, but the amount cannot exceed the amount distributed. CARES Act § 2202(a)(3). This provides the individual with the opportunity to rebuild their retirement accounts.
The CARES Act rules for distributions are optional, and plan sponsors can choose not to adopt them. However, IRS guidance provides that even if an employer does not treat plan distributions as a coronavirus-related distribution, a "qualified individual" may treat a 2020 distribution that meets the requirements to be a coronavirus-related distribution as coronavirus-related on the individual's federal income tax return. IRS Q&As on Coronavirus-Related Relief for Retirement Plans and IRAs, Q&A 9.
A "qualified individual" for this purpose means an individual: (i) who is diagnosed with the coronavirus by a test approved by the Centers for Disease Control and Prevention (CDC); (ii) whose spouse or dependent is diagnosed with the coronavirus by a test approved by the CDC; (iii) 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; (iv) who experience adverse financial consequences as a result of being unable to work due to lack of child care due to the coronavirus; or (v) who experiences adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to the coronavirus.
3. Waiver of Required Minimum Distributions in 2020. The CARES Act temporarily waives the required minimum distributions for defined contribution plans or IRAs for those who turned 70½ on or prior to December 31, 2019: (i) if 2019 is the first year of attaining age 70-1/2 then for the April 1, 2020 distribution, and (ii) for the annual minimum distributions due by December 31, 2020. IRC §401(a)(9)(I) as added by CARES Act of 2020 § 2023. Any amounts distributed in 2020 would not be eligible for a rollover distribution. However, they can be recontributed to the plan or IRA. Such relief is similar to the relief provided in 2009. The provision applies for calendar years beginning after December 31, 2019.
4. Funding Relief. The Coronavirus Aid, Relief, and Economic Security Act of 2020 gives single employer plan sponsors more time to meet their funding obligations by delaying the due date for any minimum required contributions including quarterly contributions otherwise due during the 2020 calendar year (e.g., contributions due April 15, 2020, July 15, 2020, and October 15, 2020) to January 1, 2021, but with interest accruing from the original due dates. CARES Act § 3608.
5. Plan Amendment Deadline for Coronavirus-Related Rules. The deadline that CARES Act amendments can be made is the end of the first plan year beginning on or after January 1, 2022 or such later date as the Secretary of the Treasury sets. CARES Act § 2202(c).
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