The CARES Act provides relief on retirement plan distributions and loans.
The Coronavirus Aid, Relief and Economic Security (CARES) Act passed on March 27, 2020, includes a new distribution option that may be offered in retirement plans to certain individuals impacted by the virus. The new Coronavirus Relief Distribution (CRD) would allow affected participants to take a CRD from their retirement account of up to $100,000 anytime between January 1, 2020 and December 31, 2020. The CRD has favorable tax treatment: The distribution is not subject to the 10% early-withdrawal penalty; recipients may choose to pay income tax on the distribution ratably over three years (instead of 100% in 2020); and the 20% Federal tax withholding is not required. Participants have the option of repaying the distribution into the plan within three years of taking the distribution.
The legislation includes another optional provision that temporarily increases the dollar limits for loans from retirement plans. Under the CARES Act, the maximum amount that impacted individuals may borrow from their retirement plans is temporarily increased to $100,000 for loans taken out during the 180-day period beginning on March 27, 2020. The Act allows individuals to borrow the lesser of $100,000 or 100% of their total account balance, an increase of 50% over the current rule.
The CARES Act also provides that impacted participants who have a loan repayment due between March 27, 2020 and December 31, 2020 are not required to make loan repayments for one year and may extend the loan repayment period by one year.
This provision applies to new loans taken out under the CARES Act as well as existing loans. Interest on plan loans is still payable into the participant's retirement plan account and remains taxable upon withdrawal.
Lastly, under the CARES Act, payments of Required Minimum Distributions (RMDs) from defined contribution plans and IRAs are waived for the 2020 calendar year. This includes RMDs to individuals who are already receiving them (e.g., attained 70 ½ before 2019) and individuals who have a required beginning date in 2020 (the waiver applies to both the 2020 RMD payment and the 2019 payment to the extent it has not been made).
Retirement Plan Checklist
This Retirement Plan Checklist can help plan sponsors prepare for some of the challenges they (and their workforce) now face.
- Know plan loan and withdrawal policies. Expect an increase in retirement plan loans, hardships and withdrawals. Employers may want to expand in-service withdrawal provisions to allow more flexible access to savings.
- Verify plan loan policies and loan limits. Check this information to be sure loan payment policies for employee leave of absences are defined.
- Revisit plan documents and participant communications to check for restrictions or requirements for making plan changes. For example, special rules that may apply should it be necessary for the plan to reduce or eliminate employer contributions. Take note of any notice requirements that may apply.
- Review the definition of compensation for your 401(k) plan to determine the tax treatment of any fringe benefits.
- Check plan vesting provisions. Determine how a virus-related participant leave of absence will be calculated as it relates to vesting as well as the vesting of benefits in the event of workers who are furloughed or laid off.
- Revisit investment fund agreements to confirm whether there is a required minimum level of assets for any plan institutional funds, CITs and separately managed accounts. Market declines could move plan investments to a higher fee share class unless there is an extraordinary circumstances exception or negotiated exception.
- Help participants navigate market turmoil and make informed financial decisions. Encourage participants to access investment and financial education resources from their retirement plan website.
- Consult your personal/financial advisor for assistance in making decisions about your plan.
Information about ADP's retirement plan services and planning is available here.
Find FAQs, checklists, webcasts, and the resources to help you protect and manage your workforce here: ADP Employer Preparedness Toolkit — Coronavirus Disease (COVID-19)
ADP, LLC and its affiliates do not offer investment, tax or legal advice to individuals. Nothing contained in this communication is intended to be, nor should be construed as, particularized advice or a recommendation or suggestion that you take or not take a particular action.
Questions about how laws, regulations, guidance, your plan's provisions or services available to participants may apply to you should be directed to your legal, tax or financial advisor.
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