Retirement Plan Relief for Employees under the CARES Act – Expanded Distributions and Loans

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April 7, 2020
Kelly Haab-Tallitsch
SmithAmundsen Labor & Employment Alert
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Recent legislation providing COVID-19 relief to individuals and businesses includes provisions allowing more flexibility under retirement plans for individuals impacted by COVID-19. The CARES Act permits special hardship distributions of up to $100,000 from most tax-qualified retirement plans without early-withdrawal penalty taxes, increases the maximum 401(k) loan available for participants impacted by the pandemic and allows a delay in existing loan repayments. Required minimum distributions from defined contribution plans are waived for 2020.

Coronavirus-Related Hardship Distributions and Loans

The CARES Act allows plan sponsors to adopt special provisions expanding distributions and loans for “qualified participants.” A “qualified participant” is a plan participant who: (1) is diagnosed with COVID-19, (2) has a spouse or dependent diagnosed with COVID-19, or (3) experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, or being unable to work due to COVID-19.

The 10% early withdrawal penalty does not apply to a coronavirus-related distribution. The distribution is taxable to the participant ratably over a three-year period, instead of all in the year of distribution. A participant can elect to repay the funds to the plan within three years and the taxable amount of the distribution will be reduced.

Plan sponsors can choose to impose a lower loan maximum and may impose other limits that currently apply under a plan (minimum loan amounts, loans from only certain contribution sources, number of loans outstanding, etc.).

Plans may begin taking advantage of these provisions immediately and do not need to be amended until the last day of the plan year beginning on or after January 1, 2022. 

Required Minimum Distributions NOT Required in 2020

Required Minimum Distributions (RMDs) from defined contribution plans (including 401(k), 403(b) and government 457(b) plans) and IRAs are waived for 2020 under the CARES Act.  RMDs that would otherwise been required to be made for those participants reaching age 72 during 2020 may be delayed until 2021. The delay does not apply to RMDs under defined benefit plans. Plans must be amended to reflect the waiver by the last day of the plan year beginning on or after January 1, 2022.