Among the many relief provisions included in the Coronavirus Aid, Relief and Economic Security (CARES) Act are benefits that impact employee benefit plan participants specifically. Plan administrators should be aware of the relief available to their participants to fulfill their fiduciary duties during these challenging times.
The CARES Act benefits employee benefit plan participants in the following ways:
COVID-19 hardship distributions are allowed, and have relaxed redeposit rules.
- Allows hardship distributions of up to $100,000 during 2020 from a qualified plan (401(k), 403(b), 457(b), IRA) for those affected by COVID-19.
- Considers employees to be affected if they tested positive for COVID-19 or their spouse or dependent tested positive; if they have suffered adverse financial consequences as a result of being quarantined, furloughed, or laid off; if they are unable to work due to lack of child care due to the virus; or other factors.
- Authorizes the Plan Administrator to accept the employee’s certification that the distribution is COVID-19-related.
- Waives the 10% early distribution penalty on the distributions and suspends the 20% withholding tax.
- Allows the distribution to be included in gross income over a 3-year period beginning with the year the distribution is taken, if so elected by the taxpayer.
- Gives participants three years from date of distribution to redeposit the COVID-19-related distributions into the same or other qualified plan that accepts rollovers to be tax-free, which is a significant extension of the present requirement to redeposit funds within 60 days.
- Waives Required Minimum Distributions from qualified plans from March 27, 2020 through December 31, 2020, if not taken already in 2020.
Loan limits and repayment periods are expanded.
- Increases the limit on plan loans to the lesser of $100,000 or the present value of the entire vested value. Normally, the limit is the lesser of $50,000 or the present value of 50% of the vested value. The increased limit is available for 180 days from March 27, 2020, the Act’s enactment date.
- Extends the repayment date one year for plan loans through the December 31, 2020 due date; this delay period is disregarded when calculating the 5-year maximum repayment term.
Employee benefit plans have until the last day of the first plan year beginning on or after January 1, 2022 to amend the plan for these changes, as long as the plan was operated as if the amendments are in effect.