On March 27, 2020, the United States Congress passed the Coronavirus Aid, Relief, and Economic Security Act (the Cares Act or Act) as a response to the global pandemic COVID-19.
While the Cares Act has provisions that will impact the majority of businesses and individuals, under Section 2202 of the Act, certain special provisions have been implemented that allow for use of retirement funds that are held in tax-qualified retirement plans.
Additionally, under Section 3608 of the Act, certain special provisions have been implemented for Single-Employer Pension Plan Funding Rules.
Loans from Retirement Accounts
Under the CARES Act, certain qualified loan provisions were modified to allow participants access to funds held in qualified retirement accounts for a period of 180 days from the enactment date of the CARES Act to withdraw loans on vested balances (COVID-19 Loan).
Specific provisions of the Act are below:
- New COVID-19 Loan Issuances - Under the Act, a participant may take a COVID-19 Loan during the 180 day period starting on the date of enactment of the Act with the maximum amount of $100,000 or 100% of their vested account balance.
- Current Loans – Under the Act, a participant with a current outstanding loan balance from their qualified plan that is in repayment status at the date of enactment of the Act may delay repayments through December 31, 2020. For the purposes of determining the five year loan period and the term of the loan, the one year delay period is disregarded.
Distribution from Retirement Accounts
The Care Act allows for a distribution (COVID-19 Distribution) that will be a permissible distributable event for the purpose of Section 401(k) plans under the IRS Code of 1986, as amended, governmental 457(b) plans and Code section 403(b) plans.
An individual that is personally impacted by the Coronavirus may make an election to take a distribution from their qualified retirement plan of up to $100,000.
The Act defines that the COVID-19 Distribution will be exempt from the 10% early withdrawal penalty under Section 72(t).
There are certain specifications that must be met to qualify as a COVID-19 Distribution:
- The COVID-19 Distribution must be taken between January 1, 2020 and December 31, 2020;
- The participant requesting the COVID-19 Distribution must meet one of the following criteria:
- The participant or participant’s spouse or dependent is diagnosed with coronavirus disease 2019 (COVID-19) by test submitted and tested by the Centers for Disease Control and Prevention;
- The participant experiences adverse financial consequence’s as a result of:
- Being quarantined as a result to exposure to the virus;
- Being furlough or laid off or a reduction in hours as a result of the virus;
- Inability to work due to the child care due to the virus.
- Other factors as determined by the Secretary of the Treasury.
The Act allows for the Plan Administrator to rely on the participant’s self-certification that the individual qualifies for the COVID Distribution based on the satisfaction of one of the criteria noted above.
Taxation of COVID-19 Distributions
Qualified plans are normally required to withhold immediate tax at the time of the distribution by the participant.
The Act modifies those withholding requirements and allows for:
- Under the Act, the COVID Distribution will be included in gross income ratably over three years beginning with the taxable year in which the COVID Distribution was taken.
- The Participant may elect to be taxed all at the time of the COVID distribution similar to the current normal distribution and taxation rules.
Provision to re-contribution of the CIVID Distribution
Under a provision of the CARES Act, there is the expectation that participants that take COVID Distributions may want to contribute those funds back to the qualified plan in order to place them back in a position that the COVID-19 distribution did not take place.
Participants who took the COVID-19 distribution and are wanting to return the funds to a tax deferred account, at any time during the 3 year period beginning on the date after the date in which the COVID-19 distribution was taken, may make one or more contributions (not to exceed the COVID-19 Distribution amount) to an eligible plan of which the participant is eligible to receive a rollover contribution under applicable sections of the Code.
The effect of the CARES Act on a Qualified Pension Plan
The CARES Act permits the delay in making the plan sponsor minimum required contribution to a defined benefit pension plan.
The Act has added provisions to extend the minimum required distributions that are due during the 2020 to January 1, 2021.
Interest will accrue at the effective rate of interest of the Plan during the period of the original due date and the date of the actual contribution.
The Act further permits plan sponsors to adopt these rules immediately, even if the plan does not currently allow for hardship distributions or loans, provided the plan is amended on or before the last day of the first plan year beginning on or after January 1, 2020, or later if prescribed by the Treasury Secretary.
How can Briggs & Veselka help?
Briggs & Veselka provides audits for plans subject to the Employee Retirement Income Security Act (ERISA) regulations under the U.S. Department of Labor (DOL) regulations as well as SEC 11-K filings.
The niche practice group audits approximately 170 plan audits and are in the top 1% of accounting firms who audit over 125 plans.