On March 27, the House of Representatives passed, and within hours President Trump signed, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a 2 trillion dollar stimulus and relief statute with several measures to help individuals and businesses cope with the economic issues resulting from the COVID-19 Pandemic. The Senate had passed the bill on March 25. The Act includes two major changes to the rules surrounding participants accessing funds under certain retirement plans and IRAs as a result of the Pandemic. These are: the ability of “eligible employees”: to withdraw funds from the plan during 2020 on an advantageous basis as an eligible Coronavirus-Related Distribution (CRD); and the ability to borrow more money from the plan on more favorable terms, if the plan permits participant loans. These two provisions are discussed below.
The CARES Act permits eligible retirement plans to allow CRDs of up to $100,000 from the date of enactment to the end of 2020 to an eligible individual. An eligible individual is one: 1) Who is diagnosed with the SARS-CoV-2 virus or coronavirus disease 2019 (COVID-19) because of testing positive for the virus or disease; 2) Whose spouse or dependent is so diagnosed; or 3) Who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors determined by the Secretary Treasury. The Plan Administrator can rely on an employee’s certification that the employee satisfies the requirements to be an eligible individual.
CRD withdrawals are not subject to the 10% penalty for early withdrawal, or 20% federal income tax withholding. Also, while subject to income tax, the taxes are spread over 3 years unless the participant elects to pay sooner. Most importantly, the withdrawals can be re-paid to the plan over 3 years from the date of distribution. Repayments can even be made to another employer’s plan that permits roll overs should the employee change jobs.
An eligible retirement plan is defined as any qualified retirement plan maintained by the employer (which includes pension plans), section 403(a) and 403(b) plans, and section 457(b) plans of governmental employers and IRAs.
Enhanced Loan Provisions
The CARES Act allows eligible plans to make participant loans to any eligible individual (as defined for CRDs above) in a maximum amount of the lesser of $100,000 or the present value of the participant’s vested benefit under the plan. This is double the maximum for normal participant loans. An eligible plan for these loans is any qualified plan, or a 403(a) or 403(b) plan, but not 457 plans.
In addition, for any participant loan of an eligible individual that is outstanding as of the date of enactment of the Act (March 27, 2020), the loan repayments to be made through December 31, 2020 are delayed for one year. The subsequent remaining loan repayments are re-amortized to account for the delay and interest earned during the delay.
A plan would have to be amended to permit such CRDs or loans. However, the CARES Act permits employers to implement the CRDs and loans in operation and wait to amend the plan until the last day of the first plan year beginning on or after January 1, 2022, or a later date if prescribed by the Secretary of the Treasury.
These provisions are a welcome addition to help employees have access to their retirement savings, if necessary, to tide them over during the COVID-19 Pandemic. They have many advantages over the traditional hardship withdrawals that could be taken if the plan permits. The principal advantage is that they avoid the leakage in retirement savings of traditional withdrawals because, unlike traditional withdrawals, they can be re-contributed to the plan. Hopefully, the Pandemic will be over in a few months and the economy will return to normal allowing those employees taking advantage of these new CARES Act provisions to repay the money to the plan to be used for retirement.