Tax Monitor

The CARES Act provisions that impact tax-qualified retirement plans, including offering withdrawal options, require action by the employers

April 8, 2020

By: Robert G. Tweel

The CARES Act offers several withdrawal options for participants in certain defined “eligible retirement plans.” Employers must amend their plans if they want to be able to offer CARES Act withdrawal provisions (and the plan loan provisions described below) to employees, but the CARES Act lets employers implement the withdrawals and loans in operation and wait to amend the plan until as late as the last day of the first plan year beginning on or after January 1, 2022, or such later date as prescribed by the Secretary of the Treasury. The CARES Act defines an “eligible retirement plan” to include any qualified retirement plan maintained by an employer, as well as Internal Revenue Code (“Code”) Section 403(b) plans, IRAs, and Code Section 457(b) deferred compensation plans. Employers need to consult with their third-party administrator to determine if the plan can handle the withdrawals (and the loans described below) and what amendments will be necessary should the employer choose to offer the withdrawal options.

CARES Act Withdrawal Options for eligible retirement plans:

“CRD” Withdrawals – Any “eligible retirement plan” may permit special withdrawals made on or after January 1, 2020 and before December 31, 2020 for

• A participant diagnosed with SARS-CoV-2 or coronavirus disease 2019 (collectively referred to in this Alert as “COVID-19”) by a CDC-approved diagnostic test;
• A participant whose spouse or dependent is so diagnosed;
• A participant who experiences adverse financial consequences as a result of (i) being quarantined, furloughed, or laid-off due to COVID-19, (ii) having his or her work hours reduced because of COVID-19, (iii) being unable to work due to lack of child care due to COVID-19, or (iv) the closing or hours reduction of a business owned or operated by the participant due to COVID-19; or
• Other factors as determined by the Secretary of the Treasury.

Plan sponsors are permitted to rely on a certification by the participant that they qualify for their withdrawal under at least one of the above rules.

A participant may take a CRD of up to $100,000 under the CARES Act will not be subject to the 10% penalty for an early distribution under Code Section 72(t) (applied on an aggregated plans basis across the employer’s controlled group). In addition, participants will be able to “repay” their COVID-19 withdrawals to the plan within three years following the distribution (the repayment can be in one or more payments paid at any time within the three-year period starting on the day after the date on which the distribution is received). While most will want to accept repayments, as a Plan Sponsor, you are not required to. If the participant terminates employment with the employer and receives a distribution from the plan which is eligible for rollover, then the “repayment” of the COVID-19 withdrawal can be repaid to any eligible retirement plan to which a rollover contribution could be made from the plan. A COVID-19 withdrawal does not require the plan sponsor to issue the special tax notice under Code Section 402(f). Unless otherwise elected by the participant, regular income taxation with respect to the withdrawal will be pro-rated over the 3-taxable-year period beginning with the taxable year of the distribution. Due to the three-year period in which to make the repayment, this means that an individual might have to file an amended tax return for the year in which the distribution was received, if the distribution is repaid in a later year.

“CRD” Loans – The CARES Act provides that any participant who would qualify for a COVID-19 withdrawal (as described above) may also take a loan from a “qualified employer plan” (defined under Code Section 72(p) to include 401(a), 403(a) and 403(b) plans) for up to the lesser of $100,000 or the present value of the participant’s vested benefits under such plan. For any participant loan that is outstanding under a plan (including COVID-19 loans described in the prior sentence), any installments of loan repayments that would otherwise be due during the period beginning on March 27, 2020 and ending on December 31, 2020 are delayed for one year, and the subsequent remaining installment payments will be re-amortized to reflect the delay in the due date and any interest accruing during such delay (which will continue to compound). For re-amortization purposes, the maximum loan period is extended by one year so that the re-amortized loan period can extend beyond 5 years. Because loan interest continues to accrue during the one-year extension of the loan, and the loan must be repaid within a short period of time, participants may wish to consider taking a CRD and paying the loan from the distribution. The participant would then have three years to repay the CRD, or choose not to, with taxes also spread over a three-year period. A loan default would generate taxation in the year of the default.  

Hardship Withdrawals - These special COVID-19 withdrawals are separate from the existing hardship withdrawal rules under the Code, which are already included in many employer-sponsored retirement plans. The hardship withdrawal rules and, in particular, the definition of “deemed immediate and heavy financial need” under the Code Section 401(k) regulations, were not amended. To take a hardship distribution, a Participant must prove immediate and heavy financial need. Certain medical expenses, burial or funeral expenses, and expenses to prevent eviction or foreclosure on a principal residence may meet the definition of hardship on account of an immediate and heavy financial need. A 401(k) plan is permitted to allow hardship withdrawals for expenses and losses (including loss of income) incurred in connection with FEMA-declared disasters under the Stafford Act (if the participant’s principal residence or place of employment at the time of the disaster is located in an area designated by FEMA for “individual assistance” with respect to the disaster). As of now, FEMA has not declared any location as eligible for financial assistance but has declared some locations as eligible for crisis counseling and other individual assistance. FEMA regularly issues updates regarding disaster declarations and available public and individual assistance for such declarations.

Required Minimum Distributions under Defined Contribution Plans – A waiver of the required minimum distribution (“RMD”) rules for the calendar year 2020 has been extended to individuals for their defined contribution plans. Such a waiver would avoid the negative impact on participants of having their RMDs based on their December 31, 2019 account balance but having to take the distribution from what is likely a much lower account balance at the time the distribution would have been made. Employers who wish to waive these rules can do so operationally and then amend their plan by the last day of the first plan year beginning on or after January 1, 2022. The RMD waiver can also apply to an individual retirement account. This provision is not limited to those participants impacted by the coronavirus.

Defined Benefit Plans – Employers’ minimum required contributions (as defined under Code Section 430(a)) to single-employer pension plans that would normally be due during 2020, including quarterly contributions, are delayed until January 1, 2021, at which time the full amount will be due, with interest. The delay does not apply to contributions required for other reasons such as a plan termination. For plan contribution amounts addressed in collective bargaining agreements or required under a PBGC agreement, consult with your legal counsel. In addition, for purposes of determining the funded ratio for a plan and any related funding restrictions under Code Section 436 for 2020, employers may elect to use the plan’s 2019 adjusted funding target attainment percentage (AFTAP). Some employer and plan administrator obligations have not been delayed or waived:

• There is no payment waiver for RMDs under a defined benefit plan, so employers should make sure that RMDs continue to be processed in a timely manner.
• Annual funding notices still need to be provided to participants at their normal time.
• There is currently no reduction to PBGC premiums for 2020.

ERISA Filings – The CARES Act give the Department of Labor the authority to postpone certain compliance deadlines in the event of a “public health emergency declared by the Secretary of Health and Human Services.” Plan sponsors should watch for Department of Labor guidance in this regard.