Each year, our Technical Services Committee creates a Regulatory Update covering the legislative, regulatory, and litigation developments affecting retirement plans. This year, we had a lot of material to cover with the SECURE Act, the CARES Act, developments in ESG guidance, plus much more.
Legislative changes kept plan sponsors busy, especially in the first part of 2020. Here is a snip-it of the material we cover in this year's Update.
Coronavirus Aid, Relief and Economic Security Act – CARES Act
In response to the coronavirus pandemic, the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act was signed on March 27, 2020. This large stimulus package covered a wide range of provisions designed to support Americans during the crisis. A portion of the Act allowed individuals impacted by the coronavirus (COVID-19) disease increased access to retirement savings.
The Act provided relief for individuals that qualified for a withdrawal known as a Coronavirus Related Distribution (CRD). A CRD is defined as a distribution taken in the 2020 calendar year by an individual who was diagnosed with, or whose spouse was diagnosed with, COVID-19. It also includes a very broad provision for anyone experiencing adverse financial consequences as a result of COVID-19. These could include but are not limited to individuals who experienced:
- A furlough or layoff
- Reduction in work hours
- Inability to work due to childcare
- Closure or reduction in hours of a business
- Other factors as determined by the Secretary of the Treasury
The relief extended the availability and amounts that could be withdrawn or borrowed from retirement plans, removed the early withdrawal penalty, and offered expanded repayment options for new and existing loans.
Access to Penalty-free Early withdrawals
Individuals under age 59 ½ who withdraw retirement funds are generally subject to taxes and a 10% early withdrawal penalty in the year of the withdrawal. The CARES Act waived the 10% penalty for CRDs up to $100,000 and allowed individuals to spread the income tax liability over three years.
In addition, individuals who took a CRD could repay the amount to an eligible retirement plan within three years of the distribution. The repayment would be treated as a rollover and would not impact an individual's other annual contribution limits. These provisions are available through Dec. 31, 2020.
Employers had to adopt this provision to provide their participants access to withdrawals that would not otherwise be available under the plan rules. However, if an individual was entitled to withdrawals under the plan rules (i.e., terminated employees), they can qualify the distribution as a CRD even though the employer did not treat it as such.
Loans
Individuals seeking relief from the CARES Act loan provisions must meet the same coronavirus-related criteria for a CRD. The Act increased the loan limit for a coronavirus related loan from $50,000 or 50% of the account balance to $100,000 or 100% of the account balance.
This loan option was only available between March 27, 2020, and Sept. 22, 2020 (180 days from enactment). In addition, existing loans with repayment due between March 27, 2020 and Dec. 31, 2020 may receive a one-year extension to the due date.
Individuals taking advantage of this loan extension would have their loan re-amortized for the additional interest and begin payments again in January 2021. Because this extends the length of the loan, individuals would end up paying more interest than individuals who continue with their current payment schedule.
Required Minimum Distributions
The CARES Act provided a waiver of all required minimum distributions (RMD) from tax-qualified plans for 2020. The penalty for failing to take a minimum distribution is normally very high at 50% of the amount that was supposed to be withdrawn.
The Act waives this penalty for 2020. Individuals who received regular payments to meet the RMD could stop the payment cycle but were not required to do so. Given the sharp market decline when the pandemic first hit, this relief allowed individuals to avoid selling securities in a down market to raise the RMD amount.
The CARES Act loan relief has already ended, and the other provisions will end Dec. 31, 2020. However, both plan sponsors and participants have some items to monitor after that time. Plan sponsors will need to amend their plans by the end of 2022 and provide a summary of material modifications to participants. Plan participants who received loan relief must begin repayments effective in January 2021. Plan participants who received distributions must remember to allocate the tax burden over three years and should also consider whether or not they should repay the amount withdrawn to minimize the long-term impact on their retirement savings.
Additional guidance regarding individual taxation and repayment options was provided by the IRS and may be found in the IRS Chapter of this update.
To read our full 2020 Regulatory Update, click the button below.
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