The CARES Act and What It Means for Retirement Plan Loans and Distributions

Kimberly A. Reed

Principal, CPA

28 May 2020

 The impact of the Coronavirus is going to financially impact your employees for quite some time. On March 27, 2020, the CARES (Coronavirus, Aid, Relief and Economic Security) Act was enacted to help provide them with some relief related to employee benefit plans. It is important to know that these changes are optional, and you will need to amend your plan to allow for these new provisions. An employer is permitted to choose whether, and to what extent, to amend their plan to provide for coronavirus related distributions and/or loans. You should reach out to your plan administrator to discuss the options for your plan. 

The CARES Act provides for expanded distribution options and favorable tax treatment for up to $100,000 of coronavirus- related distributions from eligible retirement plans (certain employer retirement plans, such as section 401(k) and 403(b) plans, and IRAs) to qualified individuals, as well as special rollover rules with respect to such distributions. It also increases the limit on the amount a qualified individual may borrow from an eligible retirement plan (not including an IRA) and permits a plan sponsor to provide qualified individuals up to an additional year to repay their plan loans.

You are a qualified individual if you are diagnosed with the virus SARSCoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention; your spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention; you experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19; you experience adverse financial consequences as a result of being unable to work due to lack of child care due to SARSCoV- 2 or COVID-19; or you experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.  Under section 2202 of the CARES Act, the Treasury Department and the IRS may issue guidance that expands the list of factors considered to determine whether an individual is a qualified individual as a result of experiencing adverse financial consequences. The Treasury Department and the IRS have
received and are reviewing comments from the public requesting that the list of factors be expanded. 

The administrator of an eligible retirement plan may rely on an individual’s certification that the individual satisfies the conditions to be a qualified individual in determining whether a distribution is a coronavirus-related distribution, unless the administrator has actual knowledge to the contrary. Although an administrator may rely on an individual’s certification in making and reporting a distribution, the individual is entitled to treat the distribution as a coronavirus-related
distribution for purposes of the individual’s federal income tax return only if the individual actually meets the eligibility requirements.

A coronavirus-related distribution is a distribution that is made from an eligible retirement plan to a qualified individual from January 1, 2020, to December 30, 2020, up to an aggregate limit of $100,000 from all plans and IRAs. The 10% additional tax on early distributions does not apply to any coronavirus-related distribution. The distributions generally are included in income ratably over a three year period, starting with the year in which you receive your distribution. However, you have the option of including the entire
distribution in your income for the year of the distribution. You may
repay all or part of the amount of a coronavirus-related distribution to an eligible retirement plan, provided that you complete the repayment within three years after the date that the distribution was received.  If you repay a coronavirus-related distribution, the distribution will be treated as though it were repaid in a direct trustee-to-trustee transfer so that you do not owe federal income tax on the distribution.

In addition, required minimum distributions that were required from defined contribution plans need not be made for 2020.

The CARES Act also permits an additional year for repayment of loans from eligible retirement plans (not including IRAs) and relaxes limits on loans. Certain loan repayments may be delayed for one year: If a loan is outstanding on or after March 27, 2020, and any repayment on the loan is due from March 27, 2020, to December 31, 2020, that due date may be delayed under the plan for up to one year. Any payments after the suspension period will be adjusted to reflect the delay and any interest accruing during the delay. The CARES Act also permits
employers to increase the maximum loan amount available to
qualified individuals. For plan loans made to a qualified individual from March 27, 2020, to September 22, 2020, the limit may be increased up to the lesser of: (1) $100,000 (minus outstanding plan loans of the individual), or (2) the individual’s vested benefit under the plan.

These changes could help your employees get back on their feet sooner rather than later. After considering the impact to your plan and your employees, if you determine that these changes would be beneficial, we suggest you reach out to your third-party administrator.

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