How the CARES Act affects your duty as Corporate Retirement Plan Sponsor

Retirement Plan Consulting

Apr 09, 2020

The Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law on March 27, 2020.  Since then, there has been a windfall of activity in regards to small business lending as companies struggle to stay above water.  While the law is best known for the lending program and government stimulus to the economy, it had a significant impact on corporate retirement plans.  Whether your business is in need of funding or not, you have to pay careful attention to the actions you need to take regarding your corporate retirement plan. 

The recordkeepers of the corporate retirement plans across the country are scrambling to put policies in place to implement these provisions.  It is imperative that you check with your recordkeeper or plan advisor to find out what your responsibilities are.  Some recordkeepers are requiring the employer to opt in to the provisions while others are automatically opting in with fairly short deadlines to opt out.  The information below will list the provisions that you would be considering to implement or opt out of. 

The first one is to allow plans to permit in-service coronavirus-related distributions from a participant’s vested account balance without regard to the normal withdrawal restrictions through December 31,2020.  The requirements for these distributions are as follows:

  • Limited to $100k per participant
  • Not subject to the mandatory 20% tax withholding
  • Exempt from the 10% early withdrawal penalty for participants under 59 ½
  • Eligible to be indirectly rolled back into the employer sponsored plan or an IRA within 3 years from the date the distribution is taken
  • Amounts not indirectly rolled into an IRA or employer plan are included in gross taxable income, ratably, over 3 tax years beginning in 2020 unless the participant elects to include all amounts in a single tax year

These distributions are subject to the following eligibility requirements:

  • Participant, a spouse or dependent diagnosed with a coronavirus (COVID-19 or SARS-CoV-2) illness
  • Participant experienced “adverse financial consequences” as a result of a quarantine, furlough, lay-off, reduction in work hours, business closure, the lack of child care or other factors determined by the IRS due to the coronavirus emergency

As the Plan Sponsor, you would rely on a participant’s certification of meeting the requirements. 

The second provision pertains to loans.  The two types of loan relief are:

  • Plans may allow eligible participants, as defined above, to take loans up to the lesser of $100,000 or 100% of the participant’s vested account balance for the specified period. 
  • Upon the request of an eligible participant, plan sponsors must suspend loan repayments due on outstanding loans that are in good order for a period of up to 12 months.  The relief expires on December 31, 2020.  The suspension period is to be added to the original loan term when repayments, including accrued interest, resume, regardless of the length of the loan’s original term.

These two provisions can have a significant impact on how your retirement plan is handled.  Most employers would be inclined to determine how impacted their business is by the coronavirus emergency.  It is a fairly easy decision if your business and employees are going to be negatively affected by the situation.  You can opt in so that your employees have another option in the event that they need these funds to make ends meet.  If, however, your company is not impacted at all and business is thriving, then you may want to opt out of these provisions.  You don’t want your employees taking advantage of the situation to access their retirement accounts for the wrong reasons.  On the other hand, what if there is an employee who is directly impacted by the virus?  You may want to consider opting in just in case an unanticipated situation arises.  Ultimately, you know your workforce and should work with your plan service providers to make the right decision for you and your employees.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information.

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