FAQ's about the CARES Act Impact on Retirement Plans

Frequently Asked Questions about the CARES Act Impact on Retirement Plans for Plan Sponsors

By Marianne Marvez, RPA

The Coronavirus Aid, Relief and Economic Security “CARES” Act was passed by the Senate on March 27, 2020 in an attempt to ease the financial burden created by the COVID-19 pandemic in the United States.  The new law added several mandatory and optional provisions some of which will impact retirement plans.

Recordkeepers have rushed to implement these provisions to serve their clients and some have asked clients to make quick decisions on whether or not to implement these new options. 

The concern is there are still many unanswered questions around the news provisions and implementing them is a considered a fiduciary act. Employers need to be sure that implementing these new provisions will actually end up being in the best interests of their participants and their beneficiaries.

Careful consideration and caution should be exercised prior to making any decisions.

For years we have sent the message of the importance of saving for retirement, we have explained time and again the power of compounding and how to weather stormy markets. With that in mind, employers need to carefully consider the long-term consequences of allowing employees to deplete their retirement accounts for what may be short-term needs.

What do you need to know?

Q. Do we have to adopt the COVID-19 Distribution and Loan provisions?

A. No, Plan Sponsors may decide to not implement either or both provisions.

Q. If our plan does not currently allow loans, will we be required to add loans to our plan?

A. No.

Q. If we decide to adopt the COVID-19 Distribution and Loan Provisions do we have to do it immediately?

A. No. Plan Sponsors can wait and see if this is the right provision for their plan and implement the provisions at a later date. 

• Check with your plan’s recordkeeper to determine what they require in order to add the provision later if you opt out of doing it immediately. 

• Some recordkeepers will not allow you to change your mind if you do not opt out of the provisions during the allotted time period.

Q. Should our plan offer these provisions?

A.  Maybe. Things to consider:

• Participants will be selling or borrowing their funds at the absolute worst time, when their balances have been depleted by the markets. 

• You will need to weigh the potential long-term impact to your employee’s retirement accounts against the short-term benefits of being able to access their retirement account balances now.

• Additional guidance is needed from the government to determine exactly how these options are to be administered and reported.

Q. What do you need to know about the Coronavirus Hardship Distributions?

A.  Distributions taken between January 1 and December 31, 2020 will be considered for COVID-19 distributions, providing the employee certifies that the employee, and/or his/her spouse or a dependent tested positive for COVID-19 or suffered adverse financial consequences as a result of COVID-19. The maximum distribution amount is the lesser of $100,000 or the total vested account balance. Participants will be allowed to repay the amount over a three-year period, and if unable to do so will be able to pay the taxes over the same three-year period.

Things to consider: 

• Technical guidance is needed to determine how to administer many of these provisions.

• The maximum distribution amount of $100,000 will need to be aggregated across all retirement plans including IRAs. 

• It appears that the adverse financial consequences are not extended to spouses or dependents. Technical guidance from the government is needed here.

• Adverse financial consequences include: furloughed, laid off, decreased hours or unable to work as a result of the virus.

• Will your employee be able to replace these funds within the three years?

• Will your employee be able to afford the taxes on this distribution if they cannot repay the amount within three years? (These withdrawals are not eligible for rollover and the automatic 20% federal tax withholding will be waived and the participant may waive the 10% withholding implemented as a part of this new rule. This could result in significant tax consequences for participants.)

Q. Do I have to prove my employee was impacted by the virus?

A. No, the employee will have to certify in writing they were directly impacted by the virus.

Thing to consider:

• While the rule does not require an employer to prove an employee was impacted by the virus, knowledge to the contrary could result in an implied obligation to take action. An example would be a single employee who has no dependents and does not take any sick days during the period, may not be a qualified individual.

Q. How does the CARES Act apply to Plan Loans?

A. It allows qualified participants to borrow the lesser of $100,000 or 100% of their account balance from March 27, 2020 until September 28, 2020 as a result of the Coronavirus. The maximum loan repayment period is extended from 5 to 6 years.

All loan payments on both current loans and any new loans taken out for the remainder of 2020 may be put on hold for a year. Remember this only applies to those participants impacted by COVID-19.

Things to consider: 

• Will your employee be able to repay a large loan once the grace period ends? (Employee’s making lower salaries may be tempted to borrow large amounts without the ability to repay the loan within the guidelines)

• Will employees be able to opt out of the grace period? This is not clear.

• Who will be responsible for resuming loan payments on January 1, 2021?

• How will you as the Plan Sponsor administer loans in this environment?

• Is the payroll system able to accommodate suspended loan repayments?

• What risks will you face if mistakes are made in that administration?

• Will it require temporarily amending current loan policy?

Q. Are the Required Minimum Distributions (RMDs) waived for calendar year 2020?

A. Yes. The RMD rules for defined contribution plans and IRAs will not apply to any individuals in 2020. Any RMD required to be taken by April 15, 2020 for 2019 has also been waived. This only applies to those who have not yet taken the withdrawal. The reason being the amount for the 2020 withdrawal is calculated based on the account balance as of 12/31/2019 and balances may have dramatically decreased and it would be unfair to force retirees to sell some of their investments and would prevent them from recouping those losses when the market recovers.

Q. When do plans have to been amended for the relief provisions?

A. These provisions are available as of March 27, 2020, the effective date of the CARES Act. Plans do not need to be amended for these provisions until the last day of the first plan year beginning on or after January 1, 2022; however, the plan must be operated as if the amendment was in effect if the provisions are adopted.

Click to Download these FAQ's

Please reach out to us with any questions. We are here to help!