Coronavirus Aid, Relief and Economic Security Act - CARES Act
Last week, Congress passed and President Trump signed the Coronavirus Aid, Relief and Economic Security Act which will have far-reaching impact on all parts of our economy.
We want to point out the impact on Qualified Plans. ALL of these changes are voluntary. You do NOT have to adopt any or you can choose to adopt the provisions that you believe will help your participants the most.
The Act defines a Qualified Individual as any participant:
· Who has been diagnosed with the virus (as confirmed by a CDC-approved test)
· Whose spouse or dependent has been diagnosed with the virus
· Who suffered financially from the pandemic because:
1. The participant was laid off, furloughed, quarantined, or had hours reduced;
2. The participant cannot work due to the unavailability of child care because of the pandemic; or
3. The participant’s own business has had to close or reduce hours.
The CARES Act permits the Plan Administrator to rely on the participant’s certification that he/she qualifies. Beneficiaries of deceased participants and alternate payees may also be Qualified Individuals.
Coronavirus-Related Distributions to Qualified Individuals:
These individuals can receive “coronavirus-related” distributions:
· of up to $100,000 without the application of the additional 10% premature distribution. While the distribution is exempt from the 10% penalty tax, it is still subject to ordinary income tax
· Taxes on the distribution may be spread over a three-year period
· Or the participant may repay all or part of the distribution to the affected plan or any other plan that can accept rollovers within the same three-year period. Such repayment is treated as a tax-free rollover of the funds to the plan and is not adjusted for earnings. Participants who repay distributions can file an amended return to recover taxes paid on income reported in earlier years.
· These coronavirus-related distributions are not eligible to be rolled over, which means 20% mandatory withholding does not apply. The distribution is subject to 10% withholding unless waived in writing by participants. And participants must receive a notice that they can waive the withholding.
If your plan allows for loans:
· The limits have been modified to permit loans of up to 100% of a Qualified Individual’s vested account or $100,000; whichever is less. This provision covers loans made by September 23, 2020.
· For Qualified Individuals, any loan payment due, on current or new loans, between now and December 31, 2020, can be delayed up to one year. The five-year maximum repayment period is also extended for one year.
· Interest continues to accrue on the loan during the delay period.
Required Minimum Distribution for 2020 are waived.
Participants are not required to take a distribution from defined contribution qualified plans, 403(b) plans, IRAs, and governmental 457(b) plans including those due on April 1, 2020, if not already distributed. If the RMD is due to death, the five-year maximum distribution period is determined disregarding the 2020 year. Since minimum distributions are based on prior year values, participants won’t have to sell assets under current market conditions to make a distribution based on a much higher value. Distributions for 2021 will be based on 2020 values.
Single Employer DB Contributions Delayed
Required contributions to defined benefit plans (including quarterly contributions) during 2020 do not have to be paid until January 1, 2021. The required minimum contributions will accrue interest at the plan’s rate of interest for the interim period. Also the AFTAP for 2020 can be deemed to be the same as it was for the last plan year ending before 2020.
DOL can extend Deadlines
The DOL now has the authority to delay deadlines due to public health emergencies. Hopefully they will give some extensions of Form 5500 filing deadlines.
How and when to Amend
Plans do not have to be amended for these provisions until the end of the 2022 plan year, or later if the Secretary of the Treasury provides. The amendment must be retroactive and correspond with the provisions used.
Considerations:
Although the CARES Act was passed, many provisions remain unclear while we wait for guidance from the IRS. While you can’t tell participants what to do with plan assets, when possible, help them understand the difference between a loan and a distribution. Because participant loan repayments are delayed until 2021, the effect is the same as if the participant had taken a distribution through the end of this year. If the participant’s employment is terminated within the year, the loan will be converted to a distribution at that time.
Plans can allow participants to stop deferring to free up cash flow or re-amortize loans to lower payments even if the participant isn’t a Qualified Individual and not eligible for the new payment options under the CARES act.
Many employer contributions can be stopped or lowered now and then reinstated when possible.
We’re here to help you with plan choices. If you choose to implement any of the CARES provisions, we will work with you to document your choices until amendments are available. If you want to amend your plan to meet new objectives, we can go over your options. Let us worry about your plan since your focus is on so many other issues. Our thought s and prayers are with you, your family and employees.