On Friday, March 27, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) into law. This law allows plan sponsors to expand retirement plan fund access for employees impacted by COVID-19 by making the following optional changes to their retirement plans. On Friday, June 19, the IRS released Notice 2020-50 which provided guidance on these optional changes.
A coronavirus-related distribution is a distribution from an eligible retirement plan made on or after January 1, 2020, but before December 31, 2020, for no more than $100,000 to an individual:
- Who is diagnosed with the virus SARS-CoV-2 or coronavirus disease 2019 (COVID-19) by a CDC approved test (including a test authorized under the Federal Food, Drug, and Cosmetic Act),
- Whose spouse or dependent who may be claimed on his or her Form 1040 is so diagnosed, or
- Who due to such virus or disease experiences adverse financial consequences as a result of the individual, the individual’s spouse, or a member of the individual’s household:
- being quarantined, furloughed, laid off, or having work hours reduced
- having a reduction in pay (or self-employment income) or having a job offer rescinded or start date for a job delayed,
- being unable to work due to lack of child care, or
- closing or reducing hours of a business owned or operated by the individual, the individual’s spouse, or a member of the individual’s household.
The distribution is not subject to the 10% additional income tax on early distributions that normally applies to distributions before age 59 1/2.
The Plan Administrator is only responsible for enforcing the participant’s $100,000 limit with respect to its own plan and plans within its controlled group.
Coronavirus-related distributions may be repaid at any time during the 3-year period beginning on the day after the distribution date to an eligible retirement plan that can accept rollover contributions from the recipient.
Any portion of the distribution that is taxable may be included in taxable income over a 3-year period beginning in 2020.
Participant Loans for Qualified Individuals
For loans issued to qualified individuals in the 180-day period beginning on the enactment of CARES, the maximum loan amount increases from the lesser of 50% of the participant’s vested account balance and $50,000 to the lesser of 100% of the participant’s vested account balance and $100,000.
If a qualified individual has an outstanding loan as of the date of CARES enactment or is granted a new loan at this time, the loan payments with a due date from the CARES enactment through December 31, 2020, may be suspended for up to 12 months.
The suspended loan is then reamortized with any interest that accrued during the payment delay period. The repayments begin with the first payroll on or after January 1, 2021. The term for a new loan will be six years from the date of request. If the loan was already in place, the CARES suspension period is disregarded in determining compliance with the 60-month (120-month for home loans) rule.
A qualified individual is one who is eligible for a coronavirus-related distribution.
Required Minimum Distribution Rules
Any required minimum distributions (RMDs) due in or for 2020 have been waived.
This includes initial RMDs due April 1, 2020 and April 1, 2021, and subsequent RMDs due December 31, 2020.
Beneficiaries subject to taking a complete death benefit distribution within 5 years of the participant’s death do not need to receive a distribution in 2020.
These changes can be implemented operationally now, with the enactment of CARES.
Plans implementing these CARES Act provisions must be amended by the end of the plan year beginning on or after January 1, 2022. Government plans have until the end of the plan year beginning on or after January 1, 2024, to be amended.