CARES Act Retirement Plan and IRA Provisions

March 31, 2020

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27, 2020. This legislation includes many COVID-19 relief provisions, including some that impact defined contributions plans such as 401(k) and 403(b) and IRAs. Most of these provisions are designed to relieve many of the restrictions associated with gaining access to retirement plan funds during this time of crisis. Below is a summary of the CARES Act’s retirement plan and IRA provisions.

Required Minimum Distributions (RMD)
The CARES Act suspends RMDs for 2020 for defined contributions plan, including 401k and 403(b), governmental 457(b) plans, and IRAs. It is important to note that this relief does not extend to employer sponsored defined benefit pension plans. This relief will also include individuals that have already withdrawn their required amount for 2020. Official guidance on how to properly treat these amounts should be forthcoming soon.

Enhanced Distribution Provisions
Plans may permit distributions of up to $100,000 to a participant impacted by COVID-19. Individuals are impacted if they, their spouse or a dependent are diagnosed with COVID-19 or if any of these individuals suffer coronavirus-related financial consequences due to quarantine, reduction in workforce, reduction of hours or inability to work due to lack of childcare or closure of a small business.

The 10% penalty for early withdrawal is not applicable to distributions up to $100,000. The distributed amount can be “put back” into the originating plan or another plan within three years of the date of distribution. If the amount is not put back into a plan within the three-year period, then the associated taxes can be spread over a three-year period.

These provisions are also applicable to IRAs.

Expanded Plan Loan Provisions
The limits on coronavirus-related (as defined above) participant loans are increased to $100,000 and 100% of a participant’s vested account balance.

Outstanding loan payments due during the period from the effective date of the CARES Act until December 31, 2020 can be delayed for one year.

These provisions are not applicable to IRAs, as individuals are not permitted to borrow for their IRAs.

Defined Benefit Plan Funding Relief
Defined benefit pension plans subject to ERISA required minimum contributions in 2020 now have until January 1, 2021 to make required deposits. This relief leaves several unanswered questions for sponsors of pension plans.

Even plans that do not currently allow loans or in-service distributions are permitted to avail plan participants of this relief. Plans will not be required to be amended until the end of the first plan year beginning on or after January 1, 2022.

Employers and individuals can expect additional guidance on these provisions in the coming days. If you have questions about the CARES Act retirement plan provisions, please contact Mark Flanagan of Aronson’s Compensation and Benefits Practice at 301.231.6257.