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On March 23, 2020, S.3548, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was introduced in the Senate. There are several proposed changes to the CARES Act (not yet passed at this time) that would affect retirement plans. At the time of this publication, the following changes may impact plan providers when the final CARES Act is signed into law. Although the distribution changes illustrated below are permitted by plans, they are not required. Furthermore, plans would need to be amended to reflect these new rules under the CARES Act by the last day of the plan year beginning on or after January 1, 2022 (i.e., by December 31, 2022 for calendar-year plans).
Required Minimum Distributions
To address the concerns voiced by plan participants that are 70 and 1/2 and older, the CARES Act would permit plans to suspend making required minimum distributions in 2020. This deferment would also apply to participants who turned age 70 and 1/2 in 2019 but have not received their 2019 distribution yet. Furthermore, the CARES Act provides relief to employers in providing certain tax notices for funds distributed in 2020. The suspension of required minimum distributions under the CARES Act is similar to the deferment that was applied in 2009, after the financial crisis of 2008.
Penalty-Free Coronavirus-Related 2020 Distributions
The CARES Act would allow eligible participants to elect distributions of up to $100,000 from their plan benefits, including distributions of 401(k) deferrals, without the 10% early distribution tax that would otherwise apply to payments made prior to age 59 and 1/2. The distribution must qualify as a “COVID-19-related distribution,” must be made during the 2020 calendar year, and can only be made to a “qualified individual.” A “qualified individual” is: 1) A participant who has experienced adverse financial consequences resulting from a reduction in work hours; been laid off, quarantined, or furloughed; or is unable to work due to lack of childcare on account of the disease, or 2) A participant, spouse or dependent who has been diagnosed with the virus.
Three-Year Income Inclusion and Repayment of Coronavirus-Related Distributions
A COVID-19 related distribution would be incorporated in the qualified individual’s taxable income over a three-year period under the CARES Act, unless the participant elected to have the distribution taxed in the year of distribution. The mandatory 20% withholding penalty would not apply as these distributions would not be treated as eligible rollover distributions. Furthermore, the CARES Act would allow a qualified individual to repay their COVID-19 related distribution to an eligible retirement plan within three years of taking the distribution. As such, repayment would be treated as a rollover contribution to the eligible plan.
Temporary Increase to Plan Loan Dollar Limits
The CARES Act would temporarily increase the maximum amount that a qualified individual may borrow from their plan account balance to $100,000, starting on the date the CARES Act is enacted and ending 180 days later. The CARES Act would also allow qualified individuals to borrow up to the lesser of $10,000 or 100% of their account balance, rather than 50% of their account balance under current rules.
Loan Due Date Extensions
The CARES Act would provide a one-year extension to the repayment term of a plan loan, assuming the due date occurs between the date the Act is enacted and December 31, 2020. It is unclear whether employees are allowed to opt-out of having their loan due dates extended. At present, it is mandatory that remaining payments, plus applicable interest, can be reamortized over the extended period.
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