The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020 and included provisions affecting your benefit plans. Below is what you should know:

Participant loans:

  • The maximum loan amount is increased from $50,000 or 50% of vested account balance to $100,000 or 100% vested account.
  • The increased loan amount is available for eligible loans within 180 days of enactment of CARES Act or September 23, 2020.
  • Loan payments remaining for the rest of 2020 can be delayed 1 year and repayment amounts will be adjusted with interest.
  • The 1 year delay of loan repayments does not count toward the 5 year term limit.
  • These new loan provisions apply only to employees adversely affected by COVID-19.

Waiver of required minimum distributions (RMDs):

  • Required minimum distributions for defined contribution plans, (401(k)/MP/PS/403(b) and IRAs), are waived for 2020.
  • The waiver does not apply to defined benefit and cash balance plans.
  • The waiver does include distributions required by April 1, 2020 for participants that attained age 70 ½ in 2019.
  • Distributions already received in 2020 may be rolled over.

Tax-favored withdrawals: 

  • A new Coronavirus related distribution is available for qualified participants until December 31, 2020.
  • A participant is eligible for this distribution if –  diagnosed with SARS-COV-2 or COVID-19, spouse or dependent is diagnosed, experienced adverse financial consequences as result of being quarantined, furloughed, laid off, having work hours reduced , unable to work due to lack of childcare, closing or reducing hours worked by business owned or operated by individual.
  • The distribution amount can be up to $100,000.
  • The distribution applies to all types of Contributions including 401(k), profit sharing, matching and safe harbor.
  • The requirement of attaining age 59 ½ for in-service distribution of 401(k) contributions is waived.
  • The 10% excise penalty for distributions under age 59 ½ does not apply.
  • The distribution applies to Cash Balance and Defined Benefit Plans but only if the participant terminated employment or attained age 59 ½.
  • The tax liability on the distribution can be spread over the next 3 years.
  • The distribution may be repaid or re-contributed back to the plan over the 3 year period starting on date of distribution to avoid some or all of the taxes.
  • The repayments will not be counted toward the annual contribution limits*.

*Note for 2020, the maximum contribution to a 401(k) or similar retirement plan is $19,500. If you’re 50 or older, you can also contribute an extra $6,500. The annual limit for an IRA is $6,000, with a $1,000 catch-up limit if you’re 50 or older.

Plan amendments: 

  • Plan sponsors may apply the new distribution and loan rules now without doing a formal amendment and amend the plan document(s) later.
  • Plans must be formally amended by the beginning of or after January 1, 2022 (or earlier, if the plan terminates).

Qualified wages definition:

Qualified wages are wages, (as defined in section 3121(a) of the Internal Revenue Code (the “Code”)), and compensation, (as defined in section 3231(e) of the Code), paid by an Eligible Employer to employees after March 12, 2020 and before January 1, 2021. Qualified wages include the Eligible Employer’s qualified health plan expenses that are properly allocable to the wages. Refer to your plan document for further inclusions and exclusions for eligible compensation.

 Plan considerations: 

Partial plan termination:

A partial plan termination can occur when approximately 20% or more of plan participants are terminated by the plan sponsor. The terminated participants become fully vested in all benefits.

The plan administrator should consider consulting with the IRS, their ERISA advisor, or competent legal counsel if this question should arise.

Employer matching contributions:

The plan sponsors cannot cancel employer matching contributions scheduled to be paid to participants for the 2019 plan year, or retroactively amend the plan to suspend the requirement. However, they can suspend the match prospectively with a help of an outside council to ensure the plan keeps its eligible status.

Employee Benefit Plan Team:

LHMP’s benefit plan audit team is here to help you with all of your benefit plan needs and questions. Our team is trained and is current on all the DOL, IRS and ERISA rules and regulations.

For any questions about benefit plans reach out to Ninelly Shabani, Employee Benefit Plan Audit Manager at nshabani@lhmp.com