Provisions of the CARES Act for Sponsors and Participants of the Retirement Plan

27-12-2021

This article reviews some of the main provisions of the CARES Act regarding pension and retirement plans.

Early withdrawals from plan participant retirement accounts

Generally, the Internal Revenue Code (IRC) imposes a 10% penalty on early withdrawals from retirement accounts. Early withdrawals are withdrawals before the retirement plan holder turns 59½, before death, or before he becomes disabled.

However, with the passage of the CARES Act, Section 2202, qualified individuals who have been affected by COVID-19 may be exempt from the 10% penalty on early withdrawals. Qualified individuals include the following.

• People who have tested positive for COVID-19 or who have a spouse or dependent who has tested positive.

• People with financial difficulties related to COVID due to quarantine, leave, reduced working hours or unemployment.

• People who are financially affected by the lack of childcare services for school-age children.

• People who own a business that closed or reduced their working hours as a result of COVID-19.

The early withdrawals that may be exempt from the 10% penalty are amounts up to $ 100,000 that were taken from January 1, 2020 through December 31, 2020. For those qualified individuals whose early withdrawal meets the 10% exemption % according to the CARES Act, these people must include the amount they withdrew in their taxable income. They can report “income” either in the year it was received or over a three-year period as well. The amount withdrawn can be fully or partially reimbursed to a qualified retirement plan within three years of receipt of the withdrawal.

Distributions and Hardship Loans from the Retirement Plan Under the CARES Act

People who are not qualified to receive the 10% exemption on retirement may instead qualify to take a hardship distribution due to the federally declared disaster, COVID-19. An individual’s ability to claim a hardship distribution may vary depending on whether the state in which the participant resides qualifies for individual assistance under the disaster declaration and whether the participant’s retirement plan allows such distributions.

Plan participants can also borrow from their retirement account, depending on the type of retirement account they have. The maximum loan amount has traditionally been the lesser of half of the participant’s vested account balance or $ 50,000. Loans generally must be repaid in level installments over five years, although the loan term may be longer if the loan is used to purchase or build the participant’s primary residence.

However, the general lending guidelines have been modified with the passage of the CARES Act, Section 2203. The maximum loan amount has been increased to the lesser of the participant’s total vested account balance or $ 100,000 for loans taken. within 180 days after the CARES Act takes effect. promulgation. Additionally, maturity dates for new and existing loans have been extended. Due dates for payments due on or after the enactment of the CARES Act through December 31, 2020 are extended by one year and subsequent payments are also delayed by one year.

Required Minimum Distributions (RMDs) generally must be taken by individuals by April 1 of the year following the year they turn 72 (or age 70½ for those who turned 70½ by January 1, 2020). However, with the passage of the CARES Act, Section 2203, RMDs have been suspended for the year 2020. The RMD suspension applies to individuals who took their first RMD from January 1, 2020 to April 1, 2020 .

Implications of the CARES Act for Plan Sponsors

Sponsors of single-employer pension plans generally must make a required annual contribution (ARC) to a plan. The required contribution is generally equal to the value of the benefits obtained by the participants in the year, plus a part of the insufficient financing of the plan from previous years. If plan sponsors don’t contribute, they can receive a special tax. However, with the passage of the CARES Act, Section 3608, sponsor contributions due 2020 have been suspended and can be paid, with interest, on January 1, 2021. Section 3608 also allows plans to use the funding percentage for the 2019 plan year rather than the 2020 plan year to determine if plans should impose benefit restrictions.

Private sector pension plans also face a variety of deadlines and requirements imposed by ERISA. The Secretary of Labor has the authority to delay, for up to one year, any action required under ERISA in the event of a presidentially declared disaster or a terrorist or military action. With the approval of the CARES Act, Section 3607, the events that allow the Secretary of Labor to delay deadlines have been expanded. Time delays are now allowed if the Secretary of Health and Human Services has declared a public health emergency.

In response to the passage of the CARES Act, the Pension Benefit Guaranty Corporation (PBGC) announced that it would extend the deadlines for upcoming premium payments and other filings with the agency. Expiration dates for filings and shares that would have expired on or after April 1, 2020, and before July 15, 2020, have been extended to July 15, 2020. This includes PBGC premiums, reports ERISA Section 4010 for plans with insufficient funds and the annual Form 5500. It is important to note that the due dates for some particularly important or urgent submissions have not been extended.

Careful planning is required

The rules of the ERISA and CARES Act can be very complicated and can vary depending on individual circumstances. Plan sponsors and plan participants will want to fully understand the compliance requirements before taking any action.

May 2020