Use of Retirement Funds Under the CARES Act

By Rachel Ashcroft on April 14, 2020
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Rachel Ashcroft

CARES Act - Retirement Plans

Whether you are a Plan Administrator or a participant in a retirement plan it is important to understand these benefits.

Section 2103, Special Rules for Use of Retirement Funds of the “Coronavirus Aid, Relief, and Economic Security Act” or the “CARES Act” allows tax favored withdrawals from retirement plans and changes to loan provisions for those individuals directly impacted by COVID-19. Whether you are a Plan Administrator or a participant in a retirement plan it is important to understand these benefits.

Coronavirus-related distribution

The CARES Act defines a coronavirus-related distribution as any distribution made from an eligible retirement plan to an individual who:

  • Is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention or whose spouse or dependent is diagnosed with COVID-19
  • Who experiences adverse financial consequences as a result of being furloughed or laid off or having work hours reduced due to COVID-19, being unable to work due to lack of child care due to COVID-19 or closing or reducing hours of a business owned or operated by the individual due to COVID-19

This distribution must be taken out between the date of enactment of the CARES Act and December 31, 2020.

What is the maximum amount of a coronavirus-related distribution? Is this money taxable?

The aggregate amount an individual may receive during a taxable year shall not exceed $100,000. The 10% tax penalty imposed on early distributions from retirement plans does not apply to coronavirus-related distributions.

These distributions are taxable; however, the tax may be paid ratably over a 3-year period.

Can a coronavirus-related distribution be repaid?

Yes. Any individual who received a coronavirus-related distribution may repay it over the 3-year period beginning on the date the distribution was received.

Loans from qualified plans

The CARES Act has implemented two major changes as it relates to loan provisions as follows:

  • Increase on loan limit. Loans taken by participants between the date of the CARES Act and September 23, 2020 may now be the lesser of 100% of the participant’s vested account balance or $100,000 (up from 50% of the balance or %50,000).
  • Delay of repayment. Qualified participants with an outstanding loan on or after the enactment of the CARES Act, or those taking a loan out between the enactment date and December 31, 2020 may delay the repayment of these loans for one year. Interest will continue to be accrued and loans will be re-amortized after one year.

What are the responsibilities of a Plan Administrator as they relate to the CARES Act?

First, the Plan Administrator needs to decide if they want to adopt these provisions. If the coronavirus-related distributions are adopted, the Plan Administrator is responsible for ensuring a participant does not receive more than $100,000 in coronavirus-related distributions. Plan administrators can rely on an individual’s certification that they meet the requirements of receiving a coronavirus-related distribution. It is recommended that the individual provide documentation that they meet one of the 2 criteria above without naming which specific criteria to avoid any potential HIPPA violations.

If adopting the loan provision, Plan Administrators should communicate with participants who are eligible to delay their repayments. Documentation of this election should be maintained.

Do I have to amend my Plan for these provisions?

Yes. The Plan needs to be amended no later than the last day of the first plan year beginning on or after January 1, 2022.

I’m a Plan Fiduciary. Have my responsibilities changed during this time of uncertainty?

As a Plan Fiduciary it has always been your responsibility to act in the best interest of the Plan’s participants. That has not changed. However, during these times of economic uncertainty and constant regulatory changes Plan Fiduciaries should implement these best practices:

  • Stay informed. Inspect the impact of the CARES Act on your plan and its participants.
  • Check in with your third-party administrator. Are they communicating these changes to the Plan’s participants? Gain an understanding of how they are handling these changes internally.
  • Monitor plan investments. If your plan committee is meeting bi-annually or annually, is it necessary to increase the frequency of meetings given the volatile economic environment?
  • DOCUMENT. DOCUMENT. If you aren’t already, document your plan’s committee meetings and review of plan investments.

Has the Department of Labor (DOL) announced any changes as it relates to COVID-19?

The DOL has not released any guidance as it relates to COVID-19. Guidance is expected in the coming days.

Assistance and Guidance from Freed Maxick

New call-to-actionThe Freed Maxick Covid-19 Resource Center has a wealth of information and guidance on a wide range of topics related to tax relief and benefits, regulatory relief and benefits, and business continuity in the era of Covid-19.

Click on the button to explore insights, observations and updates.

If you wish additional guidance, we are available to discuss your issues and concerns. Connect with us here or call Freed Maxick at 716.847.2651.

Please keep in mind that due to the quickly-changing nature of the COVID-19 pandemic, you should always discuss changes with your Freed Maxick advisor or legal counsel. 

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