Retirement Plan Provisions of the CARE Act and Other Considerations
We have summarized below recent legislation impacting retirement plans and how you can take advantage of these benefits:
The CARES Act creates a new emergency retirement plan distribution option dubbed the “coronavirus related distribution,” or “CRD” for short.
A CRD can be drawn from an employer sponsored retirement plan such as a 401(k) or from individual retirement accounts (IRAs), in any amount up to $100,000 from January 1, 2020 to December 31, 2020. Under the terms of the CARES Act, the normal 10% penalty tax levied on early plan distributions by the Internal Revenue Service (IRS) is waived. Furthermore, if you take a CRD the reported income can be spread over three years for tax purposes, and the distribution also can be repaid within three years to avoid taxation.
A qualified individual may take the CRD from multiple sources, such as both a qualified retirement plan and an IRA, but the total amount of distributions eligible for favorable tax treatment is limited to $100,000.
To take advantage of the CRD, participants will have to self-certify that they fall into one of the following categories:
are diagnosed with COVID-19;
have a spouse or tax dependent who is diagnosed with COVID-19; or
experience adverse financial consequences as a result of:
being quarantined due to COVID-19;
being furloughed or laid off or having work hours reduced due to COVID-19;
being unable to work due to lack of child care due to COVID-19; or
the closing or reduction in hours of a business owned or operated by the participant due to COVID-19.
A plan administrator may rely on a participant’s certification that the participant satisfies the requirements to be a qualified individual. No documentation is required.
For retirement plan loans to qualified individuals made between March 27, 2020 and September 23, 2020, the CARES Act:
increases the maximum loan amount from $50,000 to $100,000; and
allows participants to take the full amount of their vested benefit as a loan, rather than limiting the loan amount to 50% of their vested balance.
The CARES Act also delays the due date for loan repayments for qualified individuals that are due between March 27, 2020 and December 31, 2020 for 1 year, and extends the maximum 5-year repayment period accordingly.
For all participants in retirement plans and IRA owners, the CARES Act eliminates the requirement that required minimum distributions (RMDs) be made in 2020.
This avoids the need for plan participants and IRA owners to liquidate investments at a time when investments have declined in value due to the economic impact of the coronavirus pandemic.
Think carefully about whether to take advantage of this suspension however. If the effects of the pandemic dropped you into a lower tax bracket, it might make sense to take the RMD or even more out this year if you think you will be in a lower tax bracket in 2020.
If you already took the 2020 RMD, you will have to include it in gross income and pay taxes on it. But you have up to 60 days to return a distribution to an IRA or deposit it in another qualified retirement account without owing taxes on it.
If you are an employer that sponsors a qualified plan, you may want to consider taking steps such as suspending matches or even temporarily terminating plans.
This may require amending your plan and/or formal communications with employees and participants. Any such actions should be discussed with your plan service providers. Amendments to your plan will also be required for the new provisions noted above.
About the Author - Jan Forgue is a senior manager in the assurance group. In addition to planning and managing client attest engagements, she performs firm quality control responsibilities including engagement quality control reviews, coordination of annual monitoring and inspection procedures, update of the firm's quality control policies and practice aids, and provides assistance with complex accounting issues. She assists in expansion of the firm's attest practice, including peer review and accounting and attest consulting services. She is considered a subject matter expert in the employee benefit plan area. She also assists in developing staff through leading in-house training and identifying external CPE opportunities, on-the-job-training, and technical research skills.