Seyfarth Synopsis: As we have been raising in our series of blog posts and Legal Updates, the impact of the coronavirus is far-reaching, and there are a number of concerns relating to employer-sponsored retirement plans to keep in mind as we navigate this unprecedented situation. One such concern is retirement plan-related disaster relief. Yesterday, Senate Majority Leader Mitch McConnell introduced the third coronavirus stimulus package dealing with the outbreak, called the “Coronavirus Aid, Relief, and Economic Security Act” or “CARES Act.” The CARES Act includes several provisions that appear to mirror the Families First Coronavirus Response Act. Buried within the 250-page CARES Act, however, are provisions aimed at providing some retirement plan-related relief for those impacted by the coronavirus.
In the past, the IRS has provided disaster relief for victims of certain hurricanes, wildfires and other natural disasters. This relief has generally included an increased limit for plan loans, as well as relief from the 10% penalty for early retirement plan or IRA withdrawals that would normally apply (and the ability to recontribute the distribution for a period of time after it is made). The CARES Act includes similar provisions aimed at providing some relief for those impacted by the coronavirus.
- “Coronavirus-Related” Distributions. The CARES Act provides that coronavirus-related distributions (“CV Distributions”) from retirement plans (including IRAs) will not be subject to the 10% penalty that normally applies to early withdrawals (both in-service and after termination). CV Distributions, in the aggregate, may not exceed $100,000 (from all plans maintained by the employer and members of its controlled group). These CV Distributions are not eligible for rollover, but the relief would allow an individual to include the amount of the qualified CV Distribution(s) in income over a three-year period. In addition, an individual could choose to repay all or a portion of the CV Distribution(s) to a qualified retirement plan or IRA within three years. There are, however, a number of conditions that must be met in order to qualify for this relief:
- CV Distributions must be taken after the Act’s enactment, but before December 31, 2020.
- CV Distributions must be made to an individual who is diagnosed with the SARS-CoV-2 virus or with coronavirus disease 2019 (COVID-19), or to an individual whose spouse or dependent is diagnosed with the virus or disease. Alternatively, an individual is eligible for this relief if he or she experiences adverse financial consequences stemming from the virus or disease as a result of being quarantined, furloughed, laid off, having reduced work hours, being unable to work due to lack of child care, the closing or reduction of hours of a business owned or operated by the individual or other factors determined by Treasury.
In addition, although the CARES Act does not appear to expand the circumstances under which someone can take a plan distribution, there is language in the bill that indicates that a coronavirus-related distribution would be deemed to satisfy the 401(k), 403(b) and 457 plan distribution timing rules.
- Plan Loans – Increase in Limit and Extension of Period to Repay. The CARES Act would allow certain “qualified individuals” to borrow more money from their retirement plans, and have additional time to repay new or existing plan loans.
- New Loans: First, it increases the limit on plan loans to the lesser of $100,000, or 100% of the participant’s vested account balance, instead of the $50,000 and 50% vested account balance limits that normally apply under law. This would apply for loans made during the 180-day period beginning on the date of the Act’s enactment.
- Existing Loans: Second, the Act would generally extend the period for repayment of any plan loan outstanding on or after the CARES Act enactment date by one year.
The conditions for qualifying for this relief are similar to those that apply to CV Distributions. To be eligible, an individual must be diagnosed with the SARS-CoV-2 virus or with coronavirus disease 2019 (COVID-19), or have a spouse or dependent who is diagnosed with the virus or disease. Alternatively, an individual is eligible for this relief if he or she experiences adverse financial consequences stemming from the virus or disease, as described above.
- Plan Amendment Deadlines. Plan sponsors have until at least the last day of the first plan year beginning on or after January 1, 2020, to amend their plans to provide for this relief, which is optional and not mandatory. Plan sponsors of governmental plans would have an extra year to amend their plans to provide for this relief.
For purposes of the CV Distribution and loan relief, the CARES Act requires that diagnosis of the virus or COVID-19 be made pursuant to a test approved by the CDC. This requirement in the CARES Act is a bit surprising, as it would appear to exclude other types of FDA-approved tests that are being fervently developed in light of the shortage of CDC-approved test kits. It seems that a determination on the part of the plan administrator may need to be made with respect to whether someone has experienced adverse financial consequences, or has a CDC-approved diagnosis, which may necessitate substantiation (or certification) on the part of the individual. It’s unclear at this point what type of substantiation would need to be provided by an individual requesting this relief.
The CARES Act is scheduled to be negotiated with Senate Democrats today. We understand that the Senate Democrats are working on their own stimulus package, and expect negotiations to extend through the weekend. Please stay tuned to our Beneficially Yours blog as we intend to update this information as events unfold. In the interim, we hope that everyone is staying safe and secure as we all navigate these uncharted waters.