Whether you’re on the human resources or finance side of your organization, you have a lot to digest in the “Coronavirus Aid, Relief, and Economic Security Act,” or the “CARES Act.” It passed the House of Representatives today and we expect it will be signed by the President within hours of this writing. We’ll update this document if there are any changes after it’s signed.
The Act will influence your decisions on how to handle your workforce and how to structure your corporate finances during this difficult time. We have reviewed all areas of the Act and have many opinions on it. For now, though, we want to highlight key areas that will affect your retirement plan as you get questions from employees and work through important personnel decisions.
Availability of Early Distributions and Relief from Excise Tax on Them
Facts/Interpretation:
Generally, if someone takes a distribution from an IRA or from a retirement plan before they are age 59½, they will be hit with a 10% excise tax in addition to ordinary income tax on the distribution. Also, people are generally restricted from taking money from a retirement plan unless they separate from service or are allowed to take in-service or hardship withdrawals based on their specific employer’s plan rules.
The CARES act removes the separation from service restriction on retirement plan withdrawals and waives the excise tax for early distributions from an IRA or retirement plan if it occurs before December 31, 2020, and if it is made by an individual who:
Is diagnosed with Covd-19,
Has a spouse or dependent diagnosed with Covid-19, and/or
(This is the important and broad one) “Experiences adverse financial consequences as a result of being quarantined, being 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 operated by the individual due to such virus or disease….”
Translation: Many people can fit this definition. The limit on the distribution amount is $100,000. The distribution may also be repaid over the course of three years.
Practical Takeaways:
These distribution capabilities will probably not happen overnight. Recordkeeping companies will need to unwind some programming to allow this to happen and ensure the taxable codes are properly reported.
We know people are hurting and will need to have access to cash. At the same time, this delay could give us/you the time needed to give proper education and to allow the other relief measures contained in the Act to come through. We hope to avoid having people run to liquidate their retirement accounts just after a large fall in the markets. Also, ordinary income tax will be due on any distribution amount.
Increased Flexibility in Participant Loans
Facts/Interpretation:
Generally, participant loans from a retirement plan are limited to the lesser of $50,000 or 50% of a participant’s account balance. The Act bumps this to $100,000 or 100% of the participant’s account balance.
Further, there is added flexibility on participant loan repayments. There will be a lot of details to work out here. Essentially, loan payments can be delayed a year without the risk of default. The loan term will be extended by a year even if it goes longer than the statutory 5-year limit.
Practical Takeaways:
If your plan allows for loans, this could be a better tool for your employees than the distribution option stated above because a new loan will be repaid. Your participants will be putting money back into the plan when the market is low, rather than taking it all out with a low chance of putting it back in. Also, it’s not a taxable event.
At the same time, the recordkeeping and programming around delayed repayments for existing loans will be difficult. More to come from both recordkeepers and payroll providers on the best way to handle it. Your people are important to you, and we want to make this easy for them in a difficult time, but time is needed to sort this out before implementing.
Other Items
Facts/Interpretation:
Most important, so retirees aren’t forced to sell out of their investment positions after a market fall, Required Minimum Distributions (“RMDs”) are suspended for 2020. They won’t be required this year.
Additionally, the changes in distribution and loans—if your plan already allows loans—can take effect without making a formal plan amendment until 2022.
Lastly, the Department of Labor was granted leeway for extending filing deadlines. It’s likely the Form 5500 filing deadline will be extended, like it was for employers affected by recent hurricanes.
Practical Takeaways:
Let us help you decide how you’d like to proceed with the loans and distributions. After you make a decision, we’ll help you document it and communicate with your recordkeeper to make a plan for getting it done quickly and correctly.
We’re here to help in these times. Reach out with any questions.