CARES Act Signed Into Law on March 27, 2020

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020.

The CARES Act includes provisions that make it easier for people affected by the coronavirus epidemic to access their retirement savings.

It also gives retirees options to defer required minimum distributions at a time when the stock market has experienced steep declines. Many plan sponsors will likely want to make these features available to participants. Large recordkeepers are moving quickly to make these features available.

What You Should Know

Special coronavirus distribution option for eligible retirement plans:

The CARES Act allows individuals affected by the coronavirus to access up to $100,000 (in aggregate) from eligible retirement plan accounts without application of the 10% early distribution penalty. Unlike other types of withdrawals and distributions that are a source of leakage on retirement savings, coronavirus distributions can be repaid for up to three years.

  • Eligible plans: qualified defined contribution plans, 403(b) plans, IRAs or eligible 457(b) plans (pension plans appear to be eligible for coronavirus distributions).
  • Available only between January 1, 2020 and December 31, 2020.  
  • Unless the recipient elects otherwise, any income from distributions will be subject to federal income tax ratably over three years.
  • Participants have the right to repay the distributions during the three-year period beginning the day after the distribution date. The repayment should be treated as a 60-day rollover in a direct trustee-to-trustee transfer.

Plan administrators can rely on an individual's certification that they meet the following eligibility requirements for a “coronavirus-related distribution”:

  • Individual who is diagnosed, or whose spouse or dependent is diagnosed, with SARS-CoV-2 or COVID-19 using a CDC-approved test or;
  • Individual who experiences adverse financial consequences because of an inability to work due to quarantine, furlough, lay off, reduced hours, loss of child care, or the closing or reduction of hours of a business owned or operated by the individual because of SARS-CoV-2 or COVID-19.

Expansion of retirement plan loan limits:

The CARES Act provides an option to access funds through loans (which will be repaid to the plan) rather than withdrawals (which generally are not repaid). A mandatory delay of loan repayments, which applies to new loans as well as existing loans, may be helpful for participants working reduced hours or on furlough; this could prove challenging for recordkeepers.

  • Coronavirus-related plan loan limits increased from the current limit of the lesser of $50,000 and 50% of the vested account balance to the lesser of $100,000 or 100% of the vested account balance for qualified individuals who meet the requirements to receive a coronavirus-related distribution under § 2202(a) of the CARES Act. This increase is effective for loans made within 180 days following the passage of the CARES Act.
  • Due date for any plan loan repayments otherwise due between the date of enactment and December 31, 2020 is extended for coronavirus-related distribution eligible individuals by one year (with interest), and subsequent loan repayments may be “appropriately adjusted” to reflect the delay.
  • Provision appears mandatory, not optional.

2020 Required Minimum Distribution waiver:

The CARES Act allows qualified defined contribution plans, 403(b) plans, IRAs or eligible 457(b) plans to postpone by one year required minimum distributions that must be made in 2020 and required beginning dates that would occur in 2020.

  • Funds may be left in defined contribution plans/IRAs rather than taking required minimum distributions in 2020 during a period of steep market declines.
  • 2020 distributions remain available, and those distributions are exempt from the 20% mandatory withholding that applies to eligible rollover distributions and certain other requirements.

Plan amendments for CARES Act provisions:

Amendments must be adopted by the end of the first plan year beginning on or after January 1, 2022 (December 31, 2022 for calendar year plans) or, for governmental plans, after January 1, 2024 (December 31, 2024 for calendar year plans). The Treasury Department is given authority to extend these deadlines.

DOL ability to postpone deadlines for a public health emergency:

Currently, the DOL may extend deadlines under ERISA (e.g., for providing required notices) by up to one year in certain circumstances (e.g., terroristic or military action).The DOL could choose to exercise its authority under this provision to postpone deadlines in connection with the COVID-19 pandemic.

This could be applied to notice deadlines (e.g., annual fee disclosures, annual funding notices, etc.) or even deadlines for returns (e.g., Form 5500 filing deadlines). The CARES Act expands the list to include a public health emergency, as declared by the Secretary of Health and Human Services.

Hardship distributions and disaster declarations:

Under existing law, a distribution from a 401(k) account due to hardship may be allowed if an “immediate and heavy financial need” exists. Seven “deemed hardship criteria” are considered to automatically satisfy the “immediate and heavy financial need” test:

  • Expenses for medical care
  • Costs of purchasing a principal residence
  • Payment of tuition and room and board for post-secondary education
  • Payments to avoid an eviction from, or foreclosure on, a principal residence
  • Burial or funeral expenses
  • Expenses incurred to repair damages to a principal residence
  • Expenses and losses caused by federally declared disaster under certain circumstances.

Hardship distributions can be made for expenses and losses (including loss of income) in connection with a disaster declared under the Stafford Act "provided that the employee's principal residence or principal place of employment at the time of the disaster was located in an area designated by FEMA for individual assistance with respect to the disaster."