The CARES Act — How It Affects Your Employer-Sponsored Retirement Plan

By Janelle Luckenbaugh, CPA, LSWG Audit Manager

Friday, October 23, 2020 – The rules for your employer-sponsored retirement plan have been modified in light of the current pandemic.

To assist the many Americans who are struggling financially due to the economic effects of the COVID-19 pandemic, the CARES Act (the Coronavirus Aid, Relief and Economic Security Act) was signed into law on March 27, 2020.  The CARES Act provisions affect employer-sponsored retirement plans such as 401(k) plans, 403(b) plans and governmental 457(b) plans, as well as traditional IRAs (Individual Retirement Accounts).  Below is a summary of some of the significant provisions:

Participant Loans

• Participants can elect to take a loan of up to 100% of their vested account balance or $100,000, whichever is less.  Normally participants can take a loan of up to 50% of their vested account balance or $50,000 whichever is less.
• The increased loan limit is available on loans taken from March 27, 2020, through September 23, 2020.
• The participant can also elect to suspend their loan payments through December 31, 2020, and begin the 5-year loan repayment in 2021.  Qualified individuals with existing loans can also elect to suspend their loan payments from March 27, 2020, through December 31, 2020.  The loan will continue to accrue interest while the loan payments are suspended.

Required Minimum Distributions (RMD’s)

• For participants who are subject to RMDs, those payments have been waived for 2020.  If a participant has already taken their 2020 RMD, they can redeposit those funds within 60 days of the distribution with no tax consequences.

Coronavirus-Related Distributions

• The new coronavirus-related distributions are available between January 2, 2020, and December 30, 2020.
• These coronavirus-related distributions are limited to $100,000 and allow participants to withdraw funds prior to the age of 59½ without incurring the 10% early withdrawal penalty.  The $100,000 total is across all qualified retirement plans, not per plan.
• These distributions can be made in one lump sum payment or in multiple payments.
• The 20% mandatory tax withholding that normally applies to distributions is suspended.
• Taxes owed by participants on these distributions are flexible–the taxes owed on the distributions can be paid all in 2020 or can be spread over three years.
• Participants also have three years to re-deposit all or a portion of the distributions into their account and not owe taxes on the withdrawals.  The redepositing of those distributions will not be counted toward their annual contribution limit.

Not everyone is eligible for the above-mentioned provisions.  The CARES Act provisions are restricted to participants with COVID-19-related reasons for accessing their retirement funds.  The reasons include:

• The participant is diagnosed with COVID-19 (confirmed by a CDC-approved test)
• The participant has a spouse or a dependent who is diagnosed with COVID-19
• The participant is experiencing adverse financial consequences due to COVID-19.  (Examples include:  the participant was laid-off, furloughed, had reduced hours, could not work, lack of childcare due to COVID-19.)

The participant will be required to certify that they qualify for a COVID-19-related reason in order to take advantage of the CARES Act provisions and the plan administrator can rely on the participant’s self-certification that they qualify.  No further certification or authentication will be required of the plan sponsor/plan administrator.

To make things a bit more complex, employer-sponsored retirement plans are not required to adopt these new withdrawal and loan provisions.  In addition, plans can offer the new provisions immediately and retroactively amend the plan.  Plan documents must be amended on or before the last day of the plan’s year beginning after January 1, 2022 (January 1, 2024 for government plans).  We recommend that you contact your plan’s third party administrator and work with them to ensure any necessary plan amendments are adopted and any related communications to plan participants are made in the proper time frame.

Janelle Luckenbaugh, CPA, is an audit manager in LSWG’s Frederick office and holds an Intermediate Employee Benefit Plans Audit Certificate from the AICPA.  You can reach Janelle at 301.662.9200, or by email at jluckenbaugh@LSWG.cpa.