The Coronavirus Aid, Relief and Economic Security (CARES) Act includes several provisions that give retirement plan participants increased access to assets in their 401(k), 403(b), individual retirement account (IRA) and other qualified retirement accounts. The law also eases repayment rules for distributions or loans from these accounts and gives organizations flexibility by extending due dates on certain tax-related filings and payments, as well as providing conduits for some plans to suspend employer contributions.
Coronavirus-related Distributions (CRDs) and Repayments
Under the CARES Act, participants who have been affected by the coronavirus can withdraw the lesser of $100,000 or 100% of their vested account balance without being subject to the standard 10% early withdrawal penalty. In order to qualify, participants must 1) be diagnosed with the virus by a test approved by the Centers for Disease Control and Prevention, 2) have a spouse or dependent who is diagnosed with the virus by a test approved by the CDC, or 3) experience adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to the virus, being unable to work due to lack of child care due to the virus, closing or reducing hours of a business owned or operated by the individual due to the virus.
CRDs are eligible to be withdrawn on or after January 1, 2020 and before December 31, 2020. Plan sponsors do not have to make the eligibility determination as they can rely on participants to certify their eligibility to receive a CRD. CRDs are exempt from the standard 20 percent withholding rule for early withdrawals.
The CARES Act also allows repayments for CRDs. Typically, participants aren’t permitted to repay hardship withdrawals, but participants now have up to three years to repay the withdrawal amount to any of their existing eligible retirement plans—not just to the one from which they withdrew funds—and the repayments can be made as a lump sum or in installments. If the withdrawal isn’t repaid within three years, it is treated as ordinary income, but the tax on the CRD can be spread over three years.
Employers are not required to permit CRDs from their plans, but if they do elect to offer such withdrawals, plan sponsors can do so immediately, and they generally have until the end of the first plan year beginning on or after January 1, 2022, to amend their plan documents.
Loans and Repayments
The CARES Act increases the allowable employee loan amount to the lesser of $100,000 or 100% of the vested account balance for loans made on or before September 23, 2020 for qualified participants. Participants for these loans have the same qualification requirements as for the CRDs. Qualified participants who have existing loans with payments due between March 27, 2020 and December 31, 2020 can delay those payments penalty-free for up to one year, although interest will continue to accrue on these delayed payments.
As with CRDs, employers aren’t required to offer the loan provisions created under the CARES Act, but employers that choose to must amend the plan document to reflect the change by the end of the first plan year beginning on or after January 1, 2022. As an alternative, plan sponsors can choose to keep the loan limit at $50,000, but adopt the Act’s extended repayment plan; which would also require amending the plan document.
Suspending Plan Contributions
Plan sponsors with discretionary, non-elective matching contributions can suspend them immediately without amending plan documents. However, we recommend that employers develop a thoughtful communication strategy before going ahead with such a plan due to the potential impact on participants.
Safe Harbor 401(k) plans carry additional requirements related to suspending contributions. To suspend contributions, safe harbor plan sponsors must be operating at an economic loss or have a statement in their annual safe harbor notice that reserves the right to amend the contribution schedule. Plan sponsors must then give participants at least 30 days’ notice before suspending contributions, plus enough time for participants to make adjustments to their accounts.
Significantly, plans that suspend contributions will lose safe harbor status for the year and will have to perform nondiscrimination ADP/ACP testing.
Filing and Tax Payment Deadline Changes
The Act gives the Labor Department authority to delay deadlines covered under the 1974 Employee Retirement Income Security Act (ERISA).
Plan sponsors for 403(b) plans now have until June 30 to submit their pre-approved plan documents, providing an additional 90 days to amend their plans.
Plan sponsors of defined benefit plans can delay contributions due in calendar year 2020 to January 1, 2021. Any delayed contributions must include the interest accrued between the original due date and the date of delayed payment.
The IRS has extended the deadline to July 15 for any tax payments or related filings that are due April 1 through July 14. This includes certain filings due to the Pension Benefit Guaranty Corp. (PBGC), as well as individual personal tax filings and payments.
Plans that operate on a calendar year are still required to file Form 5500 on or before the due date of July 30 or request an extension to October 15. Several industry groups are lobbying Congress to automatically extend the Form 5500 filing date to October 15, alongside other requests, including an extension for certain plan participant notices so stay tuned for further developments.
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Stephano Slack is your trusted resource for high quality and efficient employee benefit plan audits in accordance with the standards of the Public Company Accounting Oversight Board (“PCAOB”), auditing standards generally accepted in the United States of America (“GAAS”) and the Employee Retirement Income Security Act (“ERISA”). Our streamlined, focused audit approach translates into cost savings to the plan sponsor. We work with plan sponsors and other fiduciaries to ensure their plans are fully compliant with ERISA reporting requirements, the Department of Labor requirements, IRS requirements and other regulations. Our experience and service offerings include:
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