CARES Act: Retirement Plan Provisions

CARES Act: Retirement Plan Provisions

March 29, 2020 - The stimulus package signed into law on March 27, 2020 gives financial relief to retirement plan participants who have been affected by COVID-19.  Some of the key provisions include:

  • Greater access to account balances (in-service distributions) without penalty
  • Increased Plan Loan amounts and expanded repayment terms
  • Temporary Waiver from having to take Required Minimum Distributions

Coronavirus Related Distributions:

Distributions of up to $100,000 may be taken from March 27, 2020 through December 31, 2020.  These distributions can come from 401(k), Profit Sharing, 403(b), Governmental 457(b) Plans as well as IRA’s.  The $100,000 limit applies to all distributions taken by the participant, and is not a per plan/IRA limit.  Employers are required to monitor all plans maintained by them and their controlled groups to prevent any participant from exceeding this limit.

To be eligible for this type of distribution, a participant must have a qualifying event listed below:

  • The participant has been diagnosed with the coronavirus
  • The participant's spouse or dependent has been diagnosed with the coronavirus
  • The participant has experienced adverse financial conditions as a result of:
    • Being quarantined
    • Being laid off
    • Having reduced hours
    • Being unable to work due to the lack of child care
    • Closing or reduced hours of a business owned or operated by the participant; or
    • Other factors determined by the Secretary of the Treasury

Just like hardship distributions, a plan administrator may rely on the participant’s certification that he or she satisfies one of the conditions listed above.

These distributions are exempt from the rule that generally does not allow “In-service” distributions prior to the age 59 ½.  For company-sponsored plans, participants will be able to tap into both their own Elective Deferral account balances as well as Employer funded Profit Sharing and/or Matching contribution balances.

These distributions will not be subject to the 10% early withdrawal penalty that typically applies to distributions taken prior to age 59 ½.  The mandatory 20% federal withholding is also not required.  Participants will also have the option to spread the taxability of the distributed amount over 3 years.

In addition, the act is allowing participants to repay the amount taken from the plan. Repayment is allowed within 3 years from the date of the original distribution. (Additional guidance is needed on the tax treatment for any repayment to the extent that the distributed amounts have already been picked up in taxable income).

Plan Loans:

In many plans,  a participant is allowed to take a loan from their account for up to the lesser of:  50% of their vested balance or $50,000.  For plan loans taken prior to September 23, 2020, the Plan loan limit is increased to the lesser of 100% of the participants account balance or $100,000.

Outstanding loans with repayments due between March 27, 2020 and December 31, 2020 can be provided a one year grace period.  Subsequent loan repayments will be adjusted to reflect any extension along with any interest that would accrue. 

Temporary Waiver of Required Minimum Distributions (RMD):

The CARES act waives RMDs that are due to be withdrawn in 2020.  This includes any first time distributions for those turning 70 ½ in 2019 that were delayed to April 1, 2020. The waiver applies to all participants required to take a RMD during the year, not just those affected by the Coronavirus. We believe that the premise behind this provision was to allow monies to remain in plans given the downturn that has taken place in the stock market this year.  As the market turns around, these accounts may rebound and ultimately provide more for retirees.

Plan Documents:

Businesses offering their employees retirement plans have written plan documents that spell out the various provisions of the plan that the company is sponsoring (eligibility, loans, hardships, investment direction, etc.).  In light of all of the above changes, the plan documents will need to be amended.  Thankfully, the deadline for getting these amendments done will not be until the end of the first plan year beginning on or after January 1, 2022.  In the meantime, DB&B will be allowing for these relaxed provisions for all of our clients that have adopted our Prototype plan document.  For our plan administration clients that follow another plan document (law firm prepared or prior TPA plan), we can help you coordinate your responsibilities.

Please feel free to contact your Dermody, Burke & Brown advisor to further discuss any questions you may have.


The information reflected in this article was current at the time of publication.  This article will not be modified or updated for any subsequent tax law changes, if any.