How the CARES Act Affects Defined Contribution Retirement Plans

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) offered new rules for loans and distributions made during the 2020 calendar year:

• In order to be eligible for any of these new distribution rules, savers had to be “qualified,” meaning they were diagnosed with COVID-19 by a CDC-approved test; had a spouse or dependent who was diagnosed; or experienced “adverse financial circumstances” by being quarantined, furloughed, laid off, given reduced hours, or unable to work by a lack of child care due to the virus or disease. Plan administrators could rely on a saver's statement that they met these requirements.
• Participating employees could take loans from their retirement plan for the lesser of up to $100,000 or the vested present value of their account; in other words, the maximum permissible loan amount was doubled. Repayment could be delayed for up to one year, with repayments and interest adjusted accordingly. Savers who had an outstanding loan with a repayment due after the enactment of the CARES Act could also delay their loan repayment(s) for up to one year.
• Distributions to qualified employees could be made for up to $100,000 with the 10% early withdrawal penalty tax waived. The distribution amount could also be included in gross income over three years. Savers could repay any distribution back into their retirement plan so that they were not locking in their losses, and those repayments would not be subject to the retirement plan contribution limits.
• Required Minimum Distributions (RMDs) for defined contribution plans could be temporarily waived, allowing savers to keep funds in their plans.
• Cash balance plans had more time to meet their funding obligations by delaying the due date for contributions during 2020 until January 1, 2021. At that time, contributions were due with interest. Plans that had not been fully funded as of December 31, 2019, and therefore had benefit restrictions could continue to apply those restrictions throughout 2020.
• Plans could adopt these rules immediately even if the plan did not currently allow for hardship distributions or loans, as long as the plan was amended on or before the last day of the first plan year after January 1, 2020.

The CARES Act allowed the Department of Labor to postpone certain deadlines, and more guidance was anticipated. There was a chance the 5500 filing deadline would be extended as well.

Please note, these provisions were specific to the year 2020. Always consult the latest federal guidelines or a financial advisor for the most current information.

Vestwell is not a law firm or tax advisor. Participants may have wished to consider hiring their own professional before making any changes to their retirement plan, as there could have been tax consequences and other adverse impacts on their retirement plan.