CARES Act: Retirement Plan Distributions and Loans Provisions for Employers

On March 27, 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Employees may be inquiring about whether they can receive distributions or loans from the company’s 401(k) plan to confront financial challenges resulting from the COVID-19 virus. The CARES Act includes several provisions regarding 401(k) distributions and loans that employers may wish to consider.

COVID-19 Related Distribution Provisions

• A 401(k) plan may allow employees to receive COVID-19-related distributions for any taxable year from an employer that do not exceed $100,000 (aggregate) from all plans maintained by the company.
• The 10% additional tax that applies to distributions for employers under age 59½ is waived between January 1, 2020 and December 31, 2020.

Who Qualifies for a COVID-19 Related Distribution?

• Qualified distributions are any distribution from a 401(k) plan or other qualified plan made to an individual under the following circumstances:
• Has been diagnosed with virus SARS-CoV-2 or COVID-19 by a test approved by the Centers for Disease Control and Prevention
• Spouse or dependent has been diagnosed by such test
• Experiences adverse financial consequences as a result of being quarantined, furloughed, terminated, subject to a reduction of hours or unable to work due to lack of child care, subject to reduced hours of a business owned or operated by the individual or other factors as determined by the Secretary of the Treasury
• Plan administrators may rely on the employee’s certification that the distribution requirements are met.

Repayment Guidelines

• Employees may repay the amount of these distributions included in income over the three-taxable-year period beginning with the taxable year the distribution is received
• Employees may repay the aggregated amount of the distribution (or any portion thereof) by making one or more contributions to their company’s plan or any other eligible retirement plan of which the individual is a beneficiary that accepts eligible rollover contributions
• Distributions are treated as eligible rollover distributions if they are repaid within three years following the date of the distribution

Temporary Waiver of Required Minimum Distributions

• The CARES Act temporarily waives required minimum distributions from 401(k) plans and other defined contribution plans and IRAs for participants who were required to receive such distributions in 2020. The waiver does not apply to distributions beginning in calendar years after 2020.

Plan Loans

Plans may increase the amount of loans available to employees who are eligible to receive COVID-19-related distributions:

• During the 180-day period following the enactment (March 27, 2020), employees may receive plan loans that do not exceed the lesser of $100,000 (increased from $50,000) or 100% (increased from 50%) of the present value of the employee’s nonforfeitable accrued benefit under the plan
• The due date for the repayment of any outstanding plan loans occurring between March 27, 2020, and December 31, 2020 can be delayed for one year. Plans adopting this provision must adjust subsequent repayments appropriately to reflect the delay in repayment and any interest accruing during the delay

What Employers Should Consider if Making Plan Amendments

Distribution and loan provisions are at the discretion of each company.

If you decide to adjust these provisions, your plan document does not have to be amended until the last day of the plan year beginning in 2022 (December 31, 2022, because your plan is a calendar year plan).

Provisions are effective immediately. It is important to review any changes with service providers to determine any fees associated with provisions.

All provisions will require drafting updated employee communications and updating the plan’s distribution and loan procedures.

Meredith Mazzola
Partner, Tax Group
mmazzola@gibney.com