The CARES Act: What Qualified Retirement Plan Sponsors Should Know

COVID-19 News and Updates | Stephanie A. Gigliotti | Apr 06, 2020

The recently passed CARES (Coronavirus Aid, Relief, and Economic Security) Act provides financial relief to individuals and businesses. This stimulus package also contains several important changes impacting qualified retirement plans.

The CARES Act has a number of provisions intended to provide relief to plan participants affected by COVID-19. We at Prager Metis want to alert our Clients, Plan Sponsors, and Fiduciaries to some of the changes. Plan sponsors should consult with their Third-Party Plan Administrators, Recordkeepers, or ERISA counsel for any of the provisions that would require amendments to current plan documents.

Here are key provisions and considerations for your qualified retirement plan:

Coronavirus-Related Distributions

The CARES Act allows participants in eligible retirement plans to take “coronavirus-related distributions” in 2020 of up to $100,000 from their retirement plan benefits through December 31, 2020.  Distributions made under this relief are exempt from the 10% penalty on early withdrawals.

A “coronavirus-related distribution” can only be made to a “qualified individual.” A qualified individual is a participant who meets either the following criteria:

  • Has been diagnosed with the virus or has a spouse or dependent who has been diagnosed with the virus, or
  • Has experienced adverse financial consequences as a result of
    • layoffs, furloughs, reduced work hours (including business owners) or being quarantined.
    • is unable to work due to lack of childcare as a result of the pandemic.

A qualified individual who takes a coronavirus-related distribution can repay the distribution to an eligible retirement plan within three years of taking the distribution.  A taxpayer may also elect to include the distribution in income ratably over three tax years beginning in 2020.

 Temporary Increase of Plan Loan Dollar Limits

Beginning with the enactment date of the CARES Act (March 27, 2020) and for 180 days subsequent the maximum amount that a qualified individual may borrow from his or her plan account balance will be temporarily increased to the lesser of $100,000 or 100% of the participant’s vested account balance.  Prior loan limitations were the lesser of $50,000 or 50% of the vested account balance.

In addition, the CARES Act provides a one-year deferral on loan repayments otherwise due between the date of the Act and December 31, 2020.  This includes new and existing loans.  The deferral will extend the loan term and interest will accrue during that period.

Temporary Waiver of Required Minimum Distributions

The CARES Act allows individuals of certain defined contribution retirement plans to suspend required minimum distributions in 2020. This provision does not apply to defined benefit plans.

Single-Employer Defined Benefit Plan Funding Relief

The deadline for any minimum required contributions by a defined benefit plan due in 2020 has been extended to January 1, 2021. The amounts due to the plan by January 1, 2021 will be increased for interest. In addition, a plan sponsor may elect to treat the plan’s adjusted funding target attainment percentage (AFTAP) for the last plan year ending before January 1, 2020 as the AFTAP for plan years that include calendar year 2020.

Plan Amendments

The Act allows plans to adopt these rules immediately, however plans are given some time for formal amendments. Plans will need to be amended to reflect changes adopted under the Act by the last day of the plan year beginning on or after January 1, 2022.

The coronavirus pandemic has created unprecedented challenges and uncertainty. Even during this difficult time, compliance and governance remain essential. Plan sponsors must be aware of how the CARES Act provisions affect their plan operations and recordkeeping and adapt as needed.  Our Employee Benefit Plan Team is here to help.  We provide a variety of compliance services for qualified retirement plans.