CARES Act offers economic relief to employers and individuals
The CARES Act, a response to the public health crisis and associated economic fallout in the wake of COVID-19, was signed into law on March 27, 2020.
The CARES Act includes provisions applicable to retirement plans including loan provisions, withdrawals and required minimum distributions (RMDs). In addition, it also includes provisions related to health savings accounts and student loan debt. Plans sponsored by governmental employers (including public schools) should review state law for any potential modifications to conform state law to the new CARES Act provisions for governmental retirement plans.
Overview of retirement plan related provisions in the CARES Act
- If allowed by your plan, greater access to retirement funds through a new withdrawal provision (“coronavirus-related distributions”, or CRDs) from 401(a), 401(k), 403(b), and governmental 457(b) plans, and traditional IRAs, and higher loan amounts from 401(a), 401(k), 403(b), and governmental 457(b) plans to help ease the financial pressures faced by individuals who contract or are negatively affected by the virus.
NOTE: The CRD and enhanced loan provisions are optional for plans to enact. If sponsors decide to adopt these provisions, plan amendments are required. Plans sponsored by nongovernmental employers must be amended by the end of the 2022 year and plans sponsored by governmental employers (including public schools) must be amended by the 2024 year, absent any additional extension by the Secretary of the Treasury.
- Waiver of required minimum distributions (RMDs) for the entire 2020 calendar year from accounts within 401(a), 401(k), 403(b) or governmental 457(b) plans, or a traditional IRA.
The eligibility requirements include an individual:
- Who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;
- Whose spouse or dependent (as defined in Code section 152) is diagnosed with such virus or disease by such a test; or
- Who experiences adverse financial consequences as a result of:
- being quarantined, furloughed or laid off or having work hours reduced due to such virus or disease;
- being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease; or
- meeting such other factors as may be issued in Treasury guidance.
Employers and service providers are entitled to rely conclusively on a participant’s self-certification to determine eligibility.
Summary of Coronavirus-Related Distributions (CRDs)
The CARES Act allows for a new type of distribution from a retirement plan or IRA called a “coronavirus-related distribution”, or CRD.
- A CRD can be requested up to an aggregate amount of $100,000 (applied to all of an individual’s retirement plans and IRAs) through December 30, 2020.
- Any applicable IRS 10% early withdrawal penalty tax and federal 20% mandatory withholding that otherwise apply to distributions will not apply to CRDs.
- The CRD will be reported as a distribution for tax year 2020, but the individual may include the amount in gross income ratably over three years – unless the individual elects to claim the income all in one year.
- The distribution must come from a 401(a), 401(k), 403(b), or governmental 457(b) plan or from a traditional IRA.
An individual who satisfies the eligibility requirements for a coronavirus-related distribution:
- May take a loan from a 401(a), 401(k), 403(b), or governmental 457(b) plan beginning on March 27, 2020 through September 22, 2020 of up to the lesser of $100,000 (taking into account the outstanding balance of all other loans taken from plans of the employer) or 100% of the nonforfeitable value of the account (note existing outstanding loan amounts and number of loans permitted under the plan will serve to decrease the amount available); and
- May delay repayment of a new or existing loan from a 401(a), 401(k), 403(b), or governmental 457(b) plan for up to one year beginning on March 27, 2020 through December 31, 2020 (the “suspension period”). Please note that interest will continue to accrue during the suspension period. The loan will be re-amortized over the remaining term of the loan plus the length of the suspension period in January 2021 and will include the outstanding principal balance plus the interest accrued during the suspension period.
Please note that a plan document may have a provision concerning the number of outstanding loans permissible. Additionally, the plan document must offer loans in order to implement this provision.
RMD waivers for 2020 calendar year
- RMDs are waived for all participants and beneficiaries in 2020 from 401(a), 401(k), 403(b), governmental 457(b) plans and from traditional IRAs.
Considerations for Plan Sponsors - CARES Act
Voya is reviewing the new law to fully understand all provisions and requirements, and we will be working closely with our clients to help you understand the provisions and considerations for implementing them in your workplace savings plans. Please visit voya.com/marketvolatilityresources for timely updates and resources.
- A key consideration is whether to offer your currently available distribution or loan option and/or the new CRD options. Employers will likely make the decision based on the needs of their specific employee population. For example, businesses that have been heavily impacted by COVID-19, such as the travel industry, airlines, small businesses and others, will likely have employees that may have a higher need or interest in taking a distribution or loan from their plan. As such the employer will need to decide to offer the existing loan provision in their plan or the new CRD loan provision or both.
- Plan sponsors will also need to work with their recordkeepers and payroll providers to address administrative issues, particularly in the case of loans. For example, for those plan sponsors that currently offer loans and/or plan to offer CRD loans, both types of loans will need to be tracked on an individual basis so that it can be determined which are CRD-eligible and which are not CRD loans. Eligible individuals (i.e., those affected by COVID-19) will not be required to make payments on loans from enactment through December 31, 2020.
- The CARES Act also provides new considerations when it comes to student loan reimbursement. Under this provision, employers are now able to reimburse a “qualified education loan.” This provision expires on December 31, 2020 so employers will have to decide if they want to offer this provision for the remainder of 2020. Since the benefit would need to meet the other requirements of educational assistance programs, employers will need to consider how and if making such an offer would align with other financial wellness resources that they already offer to help employees address student debt.
“With lost wages, significant health care costs and other unexpected expenses, we recognize that individuals may have no choice but to tap their retirement savings to address the financial challenges that they are facing today” said Charlie Nelson, CEO of Retirement and Employee Benefits at Voya Financial.
“Before acting on any of the provisions within the CARES Act, we strongly encourage employers and individuals to give careful thought to if they need to take advantage of these provisions, how to best do so, and at what levels. For example, individuals should consider emergency savings and short-term investments, as well as flexible and health savings accounts for addressing medical expenses. If someone does need to take advantage of the new coronavirus-related distribution options, it’s important to look at the tax implications of withdrawing from a qualified account and consider whether a loan or distribution would best meet their needs.”
For more information about the CARES Act, please contact your Voya relationship manager.
This material is provided by Voya for general and educational purposes only; it is not intended to provide legal, tax, or investment advice.