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Retirement Plan Provisions of the CARES Act

R. Dean Piccirillo, MSFS, CFP®, CRPS®, AIFA®   /   Rod Diaz, CRPS®, AIFA®


The CARES Act signed into law by the president March 27, 2020 provides several enhancements that give taxpayers and retirement plan participants the ability to access their plan assets for coronavirus-related financial emergencies. The Act includes unprecedented increases in hardship distributions and broadly expanded loan provisions specifically related to COVID-19. The CARES Act includes several other retirement plan-related provisions that clients sponsoring qualified retirement plans should understand. Below please find a summary of the most pertinent provisions. If you have specific questions, please reach out to your HBKS Wealth Advisors plan advisor. Together, with your administrative firm, we can help you determine whether any of the specific opportunities make sense for you and for your participants.

Hardship distributions enhanced due to coronavirus

Retirement plan participants now can take COVID-19 related withdrawals from their participant accounts. As a result of the CARES Act, individuals may now withdraw up to $100,000 from a variety of tax-favored retirement plans including 401(k) plans, IRAs and 403(b) plans. These withdrawals are referred to as coronavirus-related distributions and are not subject to the typical 10% tax that would normally apply to distributions from these types of plans made prior to age 59 ½.

The definition of coronavirus-related distributions is broad and includes distributions from tax-favored retirement plans made any time during the calendar year, January 1, 2020 through December 31, 2020. In order to qualify for this particular provision, taxpayers must meet the following requirements:

  • Be diagnosed with COVID-19 (the disease caused by a coronavirus infection)
  • Have a spouse or dependent that is diagnosed with COVID-19
  • Experience adverse financial consequences as a result of being quarantined, furloughed, laid off, working fewer hours, being unable to work due to lack of childcare, or having a business they own or operate close or reduce operations because of the coronavirus

Clearly, these provisions for qualifying for coronavirus- related distributions are very broad and ultimately most Americans may qualify.

Like hardship distributions and loans, plan sponsors are not required to permit these withdrawals, but if they choose to do so administration and compliance with this new rule is comparatively easy. Employers can self-certify that the distributions are coronavirus related.

Participant loans

Under the CARES Act, retirement plan loans have been expanded materially. For six months following the date the CARES Act was approved (September 23, 2020 or 180 days following the enactment of CARES) participants may take loans on their defined contribution plans, such as 401(k) or 403(b), of up to $100,000 or the entire vested account balance in their participant account if it is less than $100,000.

Prior to the CARES Act, the limit was $50,000 or 50% of the vested account balance. This is clearly a significant increase in the amount that participants can borrow and the ability to borrow up to 100% of your vested account balance is also a dramatic increase.

Additionally, and potentially very meaningful to participants with existing loans, scheduled participant loan repayments from March 27, 2020 (the enactment date of CARES), through December 31, 2020, may be delayed for up to one year for qualifying employees. The suspension period is to be added to the original loan term when repayments, including accrued interest, resume.

Suspension of Required Minimum Distributions (RMDs)

Interestingly, required minimum distributions from qualified retirement plans and individual retirement accounts are suspended for 2020. These rules typically require individuals over the age of 70 ½ to take a portion of their account balances each year. The normal rules for required minimum distribution rules will apply again in 2021.

If an RMD has already been taken during 2020, the participant may roll it over and defer paying taxes. They may even roll it back into the existing plan.

You may be asking yourself why this is important considering that most of the provisions of the CARES Act provide options for participants to take dollars out of their retirement plan either in the form of increased withdrawals or larger loans. Generally, this has to do with recent market volatility. If the required minimum distribution is calculated based on the values of accounts on December 31, 2019 and participant accounts are now down significantly, the date of this valuation could lead to a disproportionate RMD relative to today’s account values forcing disproportionately larger taxable distributions. So, for those taxpayers who don’t need these RMDs to support their lifestyle, leaving it in the retirement plan is a good option.

Single Employer Defined Benefit Plan Funding Rules

Plan sponsors are also provided with some flexibility under the CARES Act for defined benefit pension plans. Defined benefit pension plan sponsors are now permitted to make all contributions that would’ve been due during 2020 on January 1, 2021. So, although this doesn’t reduce the overall liability of the plan sponsor, it does provide some relief from a cash flow standpoint.

Any payments not made when they are due in 2020 are subject to interest and that must also be contributed on January 1, 2021. The delay of these contributions required for 2020 is optional.

Expansions of Department of Labor Authority to postpone certain deadlines

The Department of Labor has been given a broad authority to extend certain deadlines under the Employee Retirement Incomes Security Act of 1974 (ERISA). ERISA is the regulation that governs how retirement plan sponsors must administer their plans for the benefit of their participants and the plan’s beneficiaries.

The DOL has not yet taken such action but has the ability now to do so in the event that a public health emergency is declared by the Secretary of Health and Human Services. Stay tuned for more information here.

Amendment timing for the CARES Act

Since some plans do not offer either hardship withdrawals or loans, the CARES Act permits retirement plans to adopt distribution and loan provisions immediately, even if the plan does not currently allow for such distributions or loans.

So, plan sponsors and participants can start using these provisions immediately without having to amend their plan to use these new options. This is very unusual. In all other cases where you might want to make a change to hardship withdrawals or loans, the plan would first have to be amended.

The plan though must eventually be amended to acknowledge these provisions if adopted by the plan sponsor. These amendments must be adopted no later than the last day of the plan year beginning on or after January 1, 2022. Under the act, the Treasury Secretary is given the ability to adjust these dates further.

The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.

Any investment involves some degree of risk, and different types of investments involve varying degrees of risk, including loss of principal. It should not be assumed that future performance of any specific investment, strategy or allocation (including those recommended by HBKS® Wealth Advisors) will be profitable or equal the corresponding indicated or intended results or performance level(s). Past performance of any security, indices, strategy or allocation may not be indicative of future results.

The historical and current information as to rules, laws, guidelines or benefits contained in this document is a summary of information obtained from or prepared by other sources. It has not been independently verified, but was obtained from sources believed to be reliable. HBKS® Wealth Advisors does not guarantee the accuracy of this information and does not assume liability for any errors in information obtained from or prepared by these other sources.

HBKS® Wealth Advisors is not a legal or accounting firm, and does not render legal, accounting or tax advice. You should contact an attorney or CPA if you wish to receive legal, accounting or tax advice.

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