Last Updated 04/17/2020
We hope that you and your loved ones are well during this challenging time. We wanted to take the opportunity to share some of the latest news regarding legislation that has been passed in response to COVID-19.
The CARES Act, signed into law on March 27th, 2020, allows qualifying plans (401k, 403b, profit sharing) to amend plans to allow for Coronavirus Related Distribution and Special Loan provisions. These provisions are optional and require action by the plan sponsor.
The optional provisions outlined below are only applicable to “Affected Participants” that meet at least one of the following criteria:
- The participant was diagnosed with COVID-19
- The participant’s spouse, child or other dependent was diagnosed with COVID-19
- The participant experienced financial hardship due to a job loss, being furloughed, having work reduced hours, or was unable to work because of the inaccessibility of childcare related to COVID-19
Coronavirus Related Distribution Provision
A plan may be amended to allow for withdrawals of up to $100,000 by Affected Participants. Such withdrawals would have to be processed by December 31st, 2020. As this type of distribution is not rollover eligible, a 10% income tax withholding will be processed unless waived by the participant at the time of distribution.
The following favorable tax treatments apply:
- The 10% early distribution penalty for those under 59 ½ will be waived (income taxes will still be owed)
- The distribution amount to be included in the taxable income will be spread out over a three-year period
- The participant will have an option to deposit the withdrawn amount back into the plan within a 3-year period after the date of distribution to avoid taxation
Special Loan Provisions
- A plan may be amended to increase the available loan amount to a $100,000 or 100% of the vested account balance (whichever is lower) for loans taken between March 27th, 2020 and September 23rd, 2020. This provision is only available to Affected Participants for plans that already offer loans.
- For any new and existing loans, the loan payments due between the March 27th, 2020 and December 31st, 2020 may be delayed by up to one year. The delayed payments will continue accruing interest and will extend the duration of the loans by one year. This option will only be available to Affected Participants.
- These special loan provisions are not available to Participants whose employment is terminated (permanently). There is no specific IRS guidance regarding the meaning / definition of furlough or layoff for purposes of the CARES Act, i.e. whether it is considered a termination of employment. Generally, a termination of employment is considered to occur when there is no longer an Employer-Employee relationship, i.e. either an Employee has quit, or the Employer has terminated the Employee’s employment permanently. Whether a furlough or layoff is a termination of employment in any particular situation is ultimately a determination for the Employer to make.
Other Relief Provided by the CARES Act
In addition to allowing plan sponsors the ability to implement the above optional provisions, the following relief was also provided by the CARES Act:
Required Minimum Distribution (RMD) for 2020
All RMDs due in 2020 for defined contribution (401k, 403b, profit sharing) plans, are no longer required. Participants can still choose to take their RMDs by completing the appropriate distribution form. RMDs already taken in 2020 – including first-time 2019 RMDs that were deferred into 2020 – are now considered to be eligible for rollover. This relief does not pertain to defined benefit and cash balance plans.
Defined Benefit Plans
The due date for minimum required contributions due to be paid in 2020 has been extended to January 1st, 2021.