On March 27, 2020, in response to the COVID-19 global pandemic, Congress passed the Coronavirus, Aid, Relief, and Economic Security (CARES) Act. This is historic and sweeping legislation created to help keep workers paid and employed, allow businesses to remain operational, make necessary health care system enhancements and stabilize the economy.
The Act contains a few key provisions designed to assist retirement plan participants and IRA account holders who are struggling financially during these unprecedented times. Here are some frequently asked questions regarding these key provisions. Find more comprehensive information on other key CARES Act provisions here.
Yes. For a qualified individual, the CARES Act waives the Code Section 72(t) additional 10% penalty tax on early (pre-age 59½) withdrawals up to $100,000 from a retirement plan or IRA.
An individual qualifies for the exemption in the following circumstances:
While there are no specific details in the CARES Act, several industry sources state that given the extensive list of potential individuals who may qualify for relief under the Act, it seems that the Congressional intent was to make relief available as broadly as possible. The IRS will likely operate in kind, and take a liberal view of who has been impacted by the coronavirus enough to qualify for a coronavirus-related distribution or loan request. Plan and account administrators can rely on an individual’s self-certification that they meet the requirements of a coronavirus-related hardship distribution or loan request at the time they make the request.
Yes. However, a coronavirus-related distribution under the Act can be included proportionally in the qualified individual’s taxable income over a three-year period, unless the individual elects to have it taxed in the year of distribution. In addition, the distribution will not be treated as an eligible rollover distribution, so the mandatory 20% withholding will not apply.
Yes. The Act also allows a qualified individual who takes a coronavirus-related distribution to repay that amount tax-free back into the plan within three years of taking the distribution. Such repayment will be treated as a rollover contribution and not be subject to annual maximum contribution limits.
Yes. The CARES Act doubles the current retirement plan loan limits to the lesser of $100,000 or 100% of a qualified individual’s vested account balance in the plan. This increased loan amount is available for loans made during the 180-day period beginning on the date of enactment. In addition, the Act extends the due date of any qualified individual’s loan repayment that would otherwise be due during 2020 (but on or after the date of enactment) to one year after the otherwise applicable due date.
The qualification requirements for an increased loan limit distribution are the same as those for a hardship distribution penalty exemption.
Retirement plans may choose (but are not required) to adopt these rules immediately, even if the plan does not currently allow for hardship distributions or loans. The plan amendment deadline for adopting these new rules would be no earlier than the last day of the first plan year beginning on or after Jan.1, 2022, or later as prescribed by the Treasury Secretary.
Yes. The CARES Act suspends RMDs during 2020. This applies to Traditional IRAs, SEP IRAs, and SIMPLE IRAs, as well as 401(k), 403(b) and Governmental 457(b) plans. Furthermore, the relief applies to both retirement account owners, themselves, as well as to beneficiaries taking stretch distributions. The CARES Act not only eliminates RMDs for 2020, but any RMD that otherwise needed to be taken in 2020. More specifically, individuals who turned 70 ½ in 2019, but did not take their first RMD in 2019 (and thus, would have normally been required to take such a distribution by April 1st, 2020, as well as a second RMD for 2020 by the end of 2020) do not have to take either their 2019 RMD or their 2020 RMD.
With the passage of the CARES Act any distribution taken that would have normally been required is now treated as a regular age based or death distribution (in the case of inherited retirement assets). These distributions would then be subject to the existing IRS rules for rollover eligibility such as the 60 day one-per-twelve-month rollover rule (or not eligible for rollover for certain inherited retirement accounts). The IRS may provide additional relief in the near future regarding rollovers so participants should consult a qualified tax advisor regarding rollover eligibility.
Yes. The CARES Act waives 2020 RMD payments for beneficiaries taking stretch distributions.
Currently there are no plans to change the RMD process. LPL will let clients know that they can contact the LPL Service Center directly at (800) 558-7567 to either waive their RMD for 2020 or take it as currently scheduled.
The CARES Act expands the Department of Labor’s authority to postpone certain deadlines under ERISA. In general, the legislation expands the circumstances to go beyond a terroristic or military action to also include a public health emergency declared by the Secretary of Health and Human Services under the Public Health Service Act.
The DOL and Treasury Department may choose to provide relief from various filing requirements, such as an automatic extension of the Form 5500 series for retirement plans, an extension to the deadline for correcting a failed ADP or ACP test and an extension of the period for distributing excess contributions and excess aggregate contributions under a plan, among others. As of March 27, 2020 the agencies have not yet granted specific extensions to any plan filing requirements.
Yes. The Act provides single-employer defined benefit plan funding relief by giving companies more time to meet their funding obligations by delaying the due date for any contribution otherwise due during 2020 until Jan. 1, 2021. At that time, contributions due earlier would be due with interest. The provision also provides that a plan’s status for benefit restrictions as of Dec. 31, 2019 will apply throughout 2020, such that a plan sponsor may elect to treat the plan’s adjusted funding target attainment percentage for the last plan year ending before Jan. 1, 2020, as the adjusted funding target attainment percentage for plan years which include calendar year 2020.
This material was prepared by LPL Financial, LLC. This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.