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Legal Alert- Retirement Plan Distributions and Loans in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

By April 2, 2020August 24th, 2021No Comments

Retirement Plan Distributions and Loans in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

On March 27, 2020, Congress enacted and President Trump signed the CARES Act (Pub.L. No. 116-136). The CARES Act includes several provisions affecting distributions and loans from qualified retirement plans that are related to the COVID-19 virus. The following summarizes certain provisions of the CARES Act as is applicable to qualified retirement plan distributions and loans.

Distributions: Under § 2202(a) of the CARES Act, qualified retirement plans and IRAs may permit (but are not required to) individuals to receive Coronavirus-related distributions up to $100,000 in the aggregate from all plans maintained by the company (and any member of a controlled group). The 10% additional tax that applies to distributions received by an individual that has not attained age 59½ is waived for Coronavirus-related distributions that are received between January 1, 2020, and December 31, 2020.

Generally, a Coronavirus-related distribution is a distribution from a qualified retirement plan made to an individual (i) who is diagnosed with virus SARS-CoV-2 or COVID-19 by a test approved by the Centers for Disease Control and Prevention, (ii) whose spouse or dependent, is diagnosed for such illness by such test, or (iii) who 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, or other factors as determined by the Secretary of the Treasury. The plan administrator may rely on the employee’s certification that the Coronavirus-related distribution requirements are met.

Unless the participant elects otherwise, the Coronavirus-related distribution is to be included in income ratably over three taxable years beginning in the taxable year the distribution is received. An individual receiving a Coronavirus related distribution (other than from an IRA) may repay the amount of the distribution (or any portion thereof) by making one or more contributions to an IRA or any other eligible retirement plan. Such distributions are treated as eligible rollover distributions if they are repaid within three years following the date of the distribution.

Plan Loans: Under §2202(b) of the CARES Act, retirement plans may increase the number of plan loans available to employees who are eligible to receive Coronavirus-related distributions. More specifically, the CARES Act provides that, during the 180-day period following the date of enactment (March 27, 2020), such 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 CARES Act also allows the due date for the repayment of any outstanding plan loans occurring between March 27, 2020, and December 31, 2020, to 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.

Temporary Waiver of Required Minimum Distributions (RMDs): Section 2203 of the CARES Act temporarily waives the RMD requirement from § 401(k) and other defined-contribution plans and IRAs for participants who were required to receive such distributions in 2020. The waiver does not apply to RMDs for calendar years after 2020. Plan Amendments: The distribution and loan options discussed above are optional. If a company desires to implement these provisions in its retirement plan, the plan must be amended by the last day of the plan year beginning in 2022 (December 31, 2022, for plan years that match the calendar year).

If would like to discuss whether adopting these provisions is appropriate for your retirement plan, please contact us to set up an appointment to discuss. These provisions are effective immediately. Consultation in connection with your plan service provider to ascertain fees associated with administering these provisions, which will include drafting employee communications and updating the plan’s distribution and loan procedures, is recommended.

For further information or assistance, please feel free to reach out to:

Geoffrey Gunnerson at ggunnerson@joneswaldo.wpengine.com | (801) 407-6541

Bruce Babcock at bbabcock@joneswaldo.wpengine.com | (801) 534-7246