Retirement Relief in the CARES Act

After several days of intense negotiations, the Senate approved a stimulus package earlier this week and the House passed the stimulus package today. The Coronavirus Aid, Relief and Economic Security Act (CARES Act), signed by the president today, contains several provisions allowing individuals to gain access to their retirement funds as well as short-term funding relief for sponsors of defined benefit pension plans.

Tax-Favored Withdrawals From Retirement Plans. The CARES Act waives the 10% additional tax under Section 72(t) of the Code on early distributions from tax-qualified retirement plans for certain “coronavirus-related distributions,” generally allowing participants affected by COVID-19 or the resulting economic downturn to gain access to some of their retirement savings without additional penalties. To qualify for this tax-favored treatment, the distribution must be made on or after Jan. 1, 2020, and before Dec. 31, 2020, and cannot exceed $100,000 (including all plans maintained by members of the same controlled group). “Coronavirus-related distribution” means a distribution to (i) an individual who tests positive for SARS-CoV-2 or COVID-19, (ii) an individual whose spouse or dependent tests positive for SARS-CoV-2 or COVID-19, or (iii) an individual who experiences adverse financial consequences as a result of being quarantined, furloughed or laid off or having work hours reduced, or being unable to work due to lack of child care, or closing or reducing hours of a business owned or operated by the individual, all due to the virus or disease. The participant’s certification that one of these conditions is satisfied is sufficient for the withdrawal. The CARES Act also permits a participant to repay the distributed amount within a three-year period beginning on the day after the date on which such distribution was received if the individual is a participant of the plan and the plan accepts rollover distributions, and if not repaid allows the participant to pay income tax on the distribution ratably over such three-year period.

Loans. The CARES Act also temporarily doubles the limit on loans from qualified plans for participants eligible to take a coronavirus distribution, increasing the limit from the lesser of $50,000 or 50% of the participant’s vested account under the plan to the lesser of $100,000 or 100% of the participant’s vested account under the plan. This temporary increase applies to loans made within 180 days of enactment (March 27, 2020) of the CARES Act. In addition, the CARES Act provides that for any such participants with outstanding loans from qualified plans, repayments with respect to such loan that are due before Dec. 31, 2020, will be delayed for one-year (with interest). The one-year delay does not count toward the maximum five-year repayment period.

Temporary Waiver of Required Minimum Distribution Rules. The CARES Act temporarily waives minimum distribution requirements for defined contributions plans and IRAs for calendar year 2020 (including distributions required to be made by April 1). This provision can be implemented immediately.

Defined Benefit Funding Rules. The CARES Act provides some funding relief for single-employer plans subject to the minimum funding requirements by granting more time for companies to meet their funding obligations. The CARES Act delays payment of a minimum required contribution that would otherwise be due (both quarterly contributions and year-end contributions) during calendar year 2020 until Jan. 1, 2021. The contribution will be increased by interest for the period between the original due date (determined without regard to the funding relief provided for under the CARES Act) and the actual payment date, with interest based on the effective rate of interest for the plan for the plan year that includes the payment date.

Benefit Restrictions. The CARES Act also provides relief to the benefit restrictions under Section 436 of the Code. Section 436 of the Code restricts certain lump-sum payments, plan amendments and benefit accruals if a plan is significantly underfunded. The restrictions apply depending on the plan’s adjusted funding target attainment percentage (AFTAP). Under the CARES Act, a plan sponsor can elect to treat the plan’s AFTAP for the last plan year ending before Jan. 1, 2020, as the AFTAP for plan years that include calendar year 2020. This relief can help sponsors avoid the restrictions to benefits under Section 436 if the funded status of the plan changes significantly in the current environment.

If you would like to discuss the retirement plan-related provisions of the CARES Act, please contact a member of Kramer Levin’s Executive Compensation and Employee Benefits Department.