Seyfarth Synopsis: On March 27, 2020, the House of Representatives followed the Senate’s lead in voting overwhelmingly to pass the Coronavirus Aid, Relief, and Economic Security (CARES) Act (the “Act”), which the President immediately signed into law. This post highlights the defined contribution retirement plan provisions contained in the law. Click here to review the executive compensation provision contained in the law; click here to review the health and welfare plan provisions; and click here to review the defined benefit plan provisions.
- Tax-Favored “Coronavirus-Related” Withdrawals. Coronavirus-related distributions (“CV Distributions”) from defined contribution retirement plans (including IRAs) will not be subject to the 10% penalty that normally applies to early withdrawals. An individual may elect to include the amount of the qualified CV Distribution(s) in income over a three-year period.
Observation. While it looks like this is probably intended to be a new distribution type, we think that it is a little unclear based on the language in the Act. Some additional guidance would be helpful with respect to whether this is a new distribution right, or if it is just an exception from the penalty tax for otherwise eligible distributions that fit the criteria, with repayment rights. There is language in the Act indicating that a CV Distribution would be deemed to satisfy the 401(k), 403(b) and 457 plan distribution timing rules, which seems to support the position that this is a new distribution right. If this is a new in-service distribution right, then it should be an optional provision. Plan sponsors are not required to make in-service withdrawals available (e.g., age 59½ or hardship), so we would expect the same to apply here.
Similar to the disaster relief withdrawals provided in the past for other types of disasters, an individual may choose to repay all or a portion of the CV Distribution(s) to a defined contribution retirement plan or IRA within three years. A participant who chooses to repay is treated as having received the CV Distribution in an eligible rollover distribution, and then directly transferring it tax-free to the eligible retirement plan.
Observation. It appears that repayments are made to the plan or IRA by a participant on an after-tax basis, but until the IRS issues additional guidance, we do not know for sure how the repayment will be able to be made. If repaid to an IRA, it is not clear whether the repayment is considered a rollover for purposes of the one rollover limit per year that applies to IRAs, although the repayment of other types of disaster distributions have historically not counted toward the rollover limit.
There are a number of conditions that must be met in order to qualify for this relief:
- CV Distributions may be taken no earlier than January 1, 2020, but before December 31, 2020.
Observation. This relief may be adopted retroactive, applying to CV Distributions occurring back to January 1, 2020. When communicating this relief to participants, plan administrators may want to consider informing participants that they may be entitled to relief in 2020 for the 10% penalty tax, provided that they can certify that a distribution made earlier in 2020 was a CV Distribution.
- Total CV Distributions may not exceed $100,000, and may not be rolled over. When determining whether the limit has been exceeded, you take into account all plans maintained by the employer and members of its controlled group.
Observation: This will require coordination among various plans in an employer’s controlled group.
- 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.
Similar to earlier versions of the Act, diagnosis of the virus or COVID-19 must be made pursuant to a test approved by the CDC.
Observation. This 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. However, the Act provides that plan administrators may rely on the employee that these conditions are satisfied, so it appears that actual documentation showing diagnosis of the virus or COVID-19, or of adverse financial consequences is not required. Plan administrator’s may want to discuss how this certification process will work with the plan’s third party recordkeeper. In addition, the Act refers to an “employee” when describing the certification requirement. Based on other language in the Act, it appears that CV Distributions are available to both active participants as well as terminated participants, but it would be helpful if this was clarified.
- Plan Loans – Increase in Limit and Extension of Period to Repay. Certain “qualified individuals” (defined below) may now borrow more money from their defined contribution retirement plans, and have additional time to repay new or existing plan loans.
- New Loans: First, for a qualified individual, the limit on plan loans is increased 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 from March 27, 2020 to September 23, 2020 (the 180-day period beginning on the date of the Act’s enactment).
Observation. Similar to the loan relief issued for other types of disasters in the past, this provision appears to be optional.
- New and Existing Loans: The Act also provides some relief for existing loans, delaying repayments for plan loans outstanding on or after March 27, 2020 (date of enactment) by one year, provided the payment is otherwise due on or before December 31, 2020. This additional year is disregarded for purposes of applying the maximum 5-year term that applies to a general purpose loan, or the maximum term that applies to a home loan (pursuant to the terms of the plan and loan agreement). After the one-year period ends, it seems that the loan would need to be re-amortized to reflect any delayed payments, adjusted for interest.
Observation. It would be helpful if we heard from Treasury and/or IRS with respect to whether this provision is optional. However, similar loan relief for other disasters (e.g., 2017 hurricane relief) was optional, so we would expect the same to be true here, since the provisions of the Act appear to track provisions from prior relief acts.
Similar to the rules that apply to CV Distributions, a qualified individual is someone who is either diagnosed with the SARS-CoV-2 virus or with coronavirus disease 2019 (COVID-19), or someone who has 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.
- Waiver of 2020 Required Minimum Distributions (“2020 RMD Waiver”). In 2009, as a result of the Great Recession, the RMD rules were temporarily suspended as part of the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA), and payments that otherwise would have been RMDs for 2009 could be rolled over tax-free. In response to the current economic crisis, and concerns with forcing payments on participants during a down market, the Act provides similar relief, effective for years after 2019.
- 2020 RMD Waiver. The Act waives any RMD required to be made in 2020, provided it was not made before 2020, from defined contribution plans (including 401(k) plans, profit sharing plans, IRAs, 403(b) plans and certain 457(b) plans). The 2020 RMD Waiver does not extend to defined benefit plans.
Observation. It appears that the 2020 RMD Waiver applies to all required beginning dates occurring in 2020, even if the participant turned 70½ in the first half of 2019. This was not the case under the 2009 RMD relief. Under the 2009 RMD relief, a participant who turned 70½ in 2008 still had to take his or her distribution by April 1, 2009 (the required beginning date) because the distribution was in satisfaction of the participant’s RMD for 2008.
- Rollover of Payment. Under the Act, a participant who receives a payment in 2020 that otherwise would have been an RMD for 2020, may be able to roll the distribution over to an eligible retirement plan. If a participant does not rollover such a distribution, however, the mandatory 20% income tax withholding that would otherwise apply to an eligible rollover distribution is not applicable.
Observation. After WRERA was enacted, the IRS issued Notice 2009-82. Generally, the notice clarified the provisions of WRERA relating to the 2009 RMD waiver, provided sample amendments, and provided transitional relief for participants who received a 2009 RMD before having the opportunity to waive the distribution, extending the normal 60-day rollover period. Hopefully, the IRS may issue similar guidance in the near future.
- Plan Amendment Deadlines. Plan sponsors have at least until the last day of the first plan year beginning on or after January 1, 2022 (i.e., December 31, 2022 for calendar year plans) to amend their plans to provide for the CV Distribution, plan loan and 2020 RMD Waiver relief. Plan sponsors of governmental plans would have an extra two (2) years to amend their plans to provide for this relief (i.e., until December 31, 2024 for calendar year governmental plans). However, in order to take advantage of these extended amendment deadlines, at the plan must be operated in accordance with the change as of its effective date.
We expect that Treasury and IRS are digesting these provisions from the Act, and hopefully will issue additional guidance pertaining to these important retirement plan provisions.