The Coronavirus Aid, Relief, and Economic Security Act (CARES ACT) passed by Congress recently has several sources for aid for those employers and employees that are being negatively impacted by the virus. One of the areas the Act covers for employees pertains to retirement plans. The Act allows for expanded hardship withdrawals and loan provisions from defined contribution retirement plans. Examples of defined contribution plans are 401(k)s, 403(b) plans for employees of public schools and non-profit organizations, 457 plans for state and municipal employees, as well as employees of qualified non-profit businesses, and thrift savings plans for federal employees
For plan participants who are experiencing financial difficulties due to COVID-19 and who need to take a hardship distribution from their eligible defined contribution retirement plan, the CARES Act waives the 10% early withdrawal penalty on distributions up to $100,000. The waiver covers distributions taken on or after January 1, 2020, and before December 31, 2020. Also, the CARES Act permits individuals to pay federal tax on the income from the distribution over three years instead of within the same year the distribution is made, as is typical. The distribution amount will not be treated as an eligible rollover distribution subject to the mandatory 20% federal withholding rules, but individuals may elect that withholding and state taxes may apply.
Another benefit for plan participants is the ability for the maximum loan to be doubled, from $50,000 to $100,000 and up to 100% (up from 50%) of the vested account balance. The loans must occur within the 180 days from Enactment of the CARES ACT. The Act also allows those taking plan loans during this time the ability to delay their loan repayment(s) for up to one year and eliminates the maximum five-year loan repayment requirement for plan loans during this time.
Documentation requirements for hardship withdrawals and loans have also been relaxed; plan administrators may rely on the employees’ self-certification for the requirement of the COVID-19 hardship during this time.
Finally, the CARES ACT waives the minimum required annual distribution for participants that are at least age 70 ½ by April 1, 2020, until April 1, 2021.
Many retirement plans may not have hardship distributions or loans available in their plan documents. Employers can add both of these provisions to their plans with a plan amendment. Employers will also need to amend their plans with the new higher loan amounts and the COVID-19 hardship provision. These plan requirements can be made with plan amendments retroactively to the beginning of the plan year for 2020. We recommend that employers seek advice from their advisor or third party administrator before implementing these provisions.