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CARES Act Clean-up: Sharp objects could be hidden within your retirement plan

Jul 06, 2021

The CARES Act gave plan participants quick access to funds during the COVID crisis, although only about 6% of participants took advantage of the options offered.[1] However, as a plan sponsor you must understand your own obligations and how to keep your plan in good standing.

In most cases, the Coronavirus Aid, Relief, and Economic Security (CARES) Act did not change administrative procedures; however, it did raise a few compliance questions. With the subtle complexities involved, it is a best practice for plan sponsors to stay in close communication with their trusted administrator and, if necessary, ERISA counsel.

Coronavirus-Related Distributions

The CARES Act allowed qualified individuals to receive a “coronavirus-related distribution” (“CRD”) in the year 2020. Generally speaking, to qualify, a person or their spouse must have been economically affected by, or diagnosed with, COVID-19.

What the CARES Act changed:

  • Withdrawing up to $100,000 from their retirement plans and/or IRAs.
  • Waiving the 10% excise tax for early distributions (pre-age 59 1/2).
  • Allowing recipients to be taxed on the distribution over three years.
  • Recontributing the amount received to the distributing plan or IRA or to another plan or IRA within three years after the date the distribution was received.

A few questions raised:

  1. Is a plan required to accept a recontribution of a CRD?

No. While CRD repayments are considered rollovers, a plan is not required to accept them. If the plan does not accept rollovers, it does not have to be changed to accept rollovers or recontributions. A plan that does accept rollovers should review the recontribution of a CRD under the same procedures that apply to any other rollover contribution.

  1. Is a recontribution of a CRD a rollover?

Yes. A plan administrator accepting a recontribution of a CRD must reasonably conclude that the recontribution is eligible for rollover treatment.

Even if a plan did not make CRDs available, qualified individuals who received distributions under existing plan provisions, either as in-service withdrawals or termination distributions, can designate those distributions as CRDs. This could, for example, make a hardship withdrawal eligible for recontribution.

Participants who received distributions may be informed of their ability to repay CRDs if they find they didn’t need the entire amount they withdrew.

  1. How do recontributions of a CRD impact the amount already reported as taxable income?

Individuals may report one-third of the CRD amount as taxable income in each of three years, beginning with 2020. Alternatively, individuals may report the entire amount as taxable income on their 2020 tax returns and pay the associated taxes. However, the participant’s tax reporting is irrelevant from a plan perspective.

An individual may recontribute all or any portion of the CRD as a rollover to a plan or IRA within three years of receipt and avoid taxation on that amount. Any participant is responsible for obtaining his or her own tax advice.

Coronavirus-Related Loans

 What the CARES Act changed:

  • Limits increased. The CARES Act increased the $50,000 limit on loans to $100,000 and the cap of 50% of the borrower’s vested balance to 100% for loans from defined contribution plans for qualified individuals made from March 27, 2020 through September 22, 2020.
  • Repayments delayed. Qualified individuals could elect to defer repayments on their plan loans that would occur from March 27 through December 31, 2020 for up to one year. Repayments for such a loan are adjusted to reflect the delayed due date and any accrued interest during the delay when they resume. The delay period is ignored in determining the five-year maximum period for a plan loan.

 A few questions raised:

  1. Must plan administrators provide notice to current employees who have outstanding loans that changed?

Qualified individuals who suspended loan repayments should have been notified that repayments resumed and that their loan was re-amortized for the remaining period of the loan to account for the accrued interest during the suspension period.

  1. How will a loan “rolled in” from a prior employers’ plan by a new employee impact the plan?

Nothing changes. If a plan accepts rollovers of loans from other plans, the plan’s existing procedural rules still apply. 

  1. What happens to the loans of newly exited employees?

Nothing changes. Most plans do not permit former employees to take plan loans and require repayment of loans upon employment termination. These plans are not required to change. If a plan permits terminated employees to continue to repay outstanding loans, normal procedures apply.

  1. Should special guidance be given to employees who took a CARES Act loan and are about to retire?

No special notice is required, and normal loan procedures will apply. If a CARES Act loan has been taken, it is still a plan loan and normal disclosures will suffice.

Minimum Required Distributions

 What the CARES Act changed:

  • For 2020, all minimum required distributions were suspended.

A few questions raised:

  1. Was this required?

Most administrators suspended these payments, but the plan sponsor had discretion as to whether to implement the suspension. Payments for 2021 are required to be paid by December 31, 2021 (or April 1, 2022 for initial required distributions for 2021).

What Else Should I Know?

One other thing to keep in mind is to speak with your plan administrator because plan amendments for the CARES Act provisions implemented are required by the end of the 2022 plan year (the 2024 plan year for governmental plans).

While we look towards recovery, a lot of has changed, but most has stayed the same. Hopefully, these detailed particulars were helpful as you oversee your company’s retirement plan. As you know, managing a retirement is no walk in the park, so when you have questions and would like to discuss in more detail, we are always here to help.

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.

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[1] Vanguard. “Revisiting the CARES Act and its impact on retirement savings.” January 2021.