CARES Act Aftermath: What Plan Sponsors Need to Do

The Coronavirus Aid, Relief, and Economic Security (CARES) Act gave plan participants quick access to funds during the COVID crisis, although only about 6% of participants took advantage of the options offered. [1] However, as a plan sponsor it is still important to understand your obligations surrounding CARES and how to keep your plan in good standing.

In most cases, the CARES Act did not change administrative procedures; however, it did raise a few compliance questions. Given the subtleties, it is best for plan sponsors to stay in close communication with their trusted administrator and, if necessary, ERISA counsel. With that in mind, here’s a rundown of a few of the Act’s more important provisions.

Coronavirus-Related Distributions

The CARES Act allowed qualified individuals to receive a Coronavirus-Related Distribution (CRD) in the year 2020. Generally speaking, to qualify, a person or their spouse must have been economically affected by, or diagnosed with, COVID-19.

What the CARES Act changed:

·       Withdrawing up to $100,000 from their retirement plans and/or IRAs.

·       Waiving the 10% excise tax for early distributions (before age 59 1/2).

·       Allowing recipients to be taxed on the distribution over three years.

·       Recontributing the amount received to the distributing plan or IRA or to another plan or IRA within three years after the date the distribution was received.

Key questions raised:

1.     Is a plan required to accept a re-contribution of a CRD?

No. While CRD repayments are considered rollovers, a plan is not required to accept them. If the plan does not accept rollovers, it does not have to be changed to accept rollovers or re-contributions of CRDs. A plan that does accept rollovers should review the re-contribution of a CRD under the same procedures that apply to any other rollover contribution.

2.     Is a re-contribution of a CRD a rollover?

Yes. A plan administrator accepting a re-contribution of a CRD must reasonably conclude that the re-contribution is eligible for rollover treatment.

Even if a plan did not make CRDs available, qualified individuals who received distributions under existing plan provisions, either as in-service withdrawals or termination distributions, can designate those distributions as CRDs. This could, for example, make a hardship withdrawal eligible for re-contribution.

Participants who received distributions may be, but are not required to be, informed of their ability to repay CRDs, if they desire.

3.     How do re-contributions of a CRD impact the amount already reported as taxable income?

Individuals may report one-third of the CRD amount as taxable income in each of three years, beginning with tax year 2020. Alternatively, individuals may report the entire amount as taxable income on their 2020 tax returns and pay the associated taxes. However, the participant’s tax reporting is irrelevant from a plan perspective.

An individual may re-contribute all or any portion of the CRD as a rollover to a plan or IRA within three years of receipt and avoid taxation on that amount. Just as above, participants are responsible for obtaining their own tax advice.

Coronavirus-Related Loans

What the CARES Act changed:

• Limits increased. The CARES Act increased the $50,000 limit on loans to $100,000 and the cap of 50% of the borrower’s vested balance to 100% for loans from defined contribution plans for qualified individuals, i.e. those affected by COVID-19, made from March 27, 2020 through September 22, 2020.

• Repayments delayed. Qualified individuals could elect to defer repayments on their plan loans that would occur from March 27 through December 31, 2020 for up to one year. Repayments for such a loan are adjusted to reflect the delayed due date and any accrued interest during the delay when they resume. The delay period is ignored in determining the five-year maximum period for a plan loan.

 A few questions raised:

1.     Must plan administrators provide notice to current employees who have outstanding loans that changed?

Qualified individuals who suspended loan repayments should have been notified that repayments resumed and that their loan was re-amortized for the remaining period of the loan to account for the accrued interest during the suspension period.

 2.     How will a loan “rolled in” from a prior employers’ plan by a new employee impact the plan?

Nothing changes. If a plan accepts rollovers of loans from other plans, the plan’s existing procedural rules still apply.

3.     What happens to the loans of newly exited employees?

Again, nothing changes. Most plans do not permit former employees to take plan loans and require repayment of loans upon employment termination. If a plan permits terminated employees to continue to repay outstanding loans, normal procedures apply.

 4.     Should special guidance be given to employees who took a CARES Act loan and are about to retire?

No special notice is required, and normal loan procedures apply. CARES Act loans are treated like any other loans, in that regard, and normal disclosures suffice.

Required Minimum Distributions (RMDs)

What the CARES Act changed:

• For 2020, all RMDs were suspended.

Key questions raised:

1.     Was this required?

Most administrators suspended these payments, but the plan sponsor had discretion as to whether to implement the suspension.

2. What about 2021 RMDs?

RMDs for 2021 are required to be paid by December 31, 2021 (or April 1, 2022 for initial required distributions for 2021).

What Else Should I Know?

One other thing to keep in mind is to speak with your plan administrator because the associated plan amendments for the CARES Act provisions that were implemented are required by the end of the 2022 plan year (the 2024 plan year for governmental plans).

While we look towards recovery, it is important to take a momentary look back at the CARES Act emergency legislation as well to ensure that your plan remains compliant. Managing a retirement is no walk in the park. So, when you have questions or would like to discuss your plans features and benefits in more detail, please do not hesitate to reach out. We are always here to help.

[1] Vanguard. “Revisiting the CARES Act and its impact on retirement savings.” January 2021.