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Impact of the CARES Act on Employee Benefit Plans

By Todd Klaben, on April 7th, 2020

There’s been a lot of discussion related to the Coronavirus Aid, Relief and Economic Security (CARES) Act, mostly related to payroll and various loan programs. However, for those employers with retirement plans, there are areas within the CARES Act to be aware of.

Below are optional provisions highlighted within the CARES ACT that plans may choose to adopt for qualified participants:

  • Within the CARES Act there is a new in-service distribution related to coronavirus-related expenses. Coronavirus-Related Distributions (CRD) can be made up to $100,000 between January 1, 2020 through December 31, 2020. A CRD can be taken for any individual, spouse or dependent that has been diagnosed with COVID-19 by a test approved by the Center for Disease Control and Prevention or who has experienced adverse financial consequences as a result of being quarantined, furloughed or laid off or having hours reduced due to the virus, or unable to work, due to lack of child care, closing or reducing hours of a business owned or operated by and individual, or other factors as determined by the Secretary of the Treasury. These CRD’s are not subject to the 10% premature distribution penalty. In addition, there is an option to waive any mandatory tax withholding. The Act also permits the indirect rollover of any CRD within 3 years of taking the distributions. Also, individuals have the option to include these distributions in their taxable income over the 3-taxable year period beginning with 2020. Therefore, they can spread the tax over 3 years, instead of just one.
  • Participant loan dollar limits have been temporarily increased to the lessor of $100,000 (previously $50,000) or 100% of the participant’s vested balance (previously 50%). This only applies to loans taken within 180 days of the enactment, which would be March 27, 2020 to September 23, 2020. In addition, the Act allows participants to request a one-year delay of repayment due in 2020. Any suspension period will be added to the original loan term, allowing the term to be over the typical 5-year maximum. However, interest will continue to accrue on any outstanding balance and ultimately the loan would need to be re-amortized.
  • The CARES Act also included additional relief related to Required Minimum Distributions (RMD) that do not require adoptions to plan documents. Included in the CARES Act is a temporary waiver of RMDs for the calendar year 2020. This waiver is limited to defined contribution plans (doesn’t apply to 457(b) plans or defined benefit plans). In addition, this includes those that have not yet received their first distribution if they turned 70 ½ in 2019 and needed it by April 1, 2020. If these were already taken, they can be “paid back” to the plan or rolled over, unless 60 days have already passed.

The CARES Act did not have any specific changes as it related to Hardship Distributions. However, for those states and areas where it has been declared a major disaster area by FEMA (for example New York State) these COVID-19 related losses can qualify for hardship withdrawals.

Lastly, keep in mind, DOL regulations for timely remittance of employee deferral and loan repayments remain in place. So, continue to make those remittances timely, even in tough cash flow scenarios.

Some of the provisions noted above may need an amendment to your current plan documents, please contact your plan administrator to discuss what may be needed. For additional information or questions related to any of the information we provide, please directly contact a member of your Bonadio client service team or these members below.

The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We therefore make no warranties, expressed or implied, on the services provided hereunder.

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Written By

Todd Klaben Headshot
Todd Klaben
Regional Managing Partner, Central NY Region

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