This letter comes to those of you whose companies sponsor retirement plans, and where you serve in an oversight role as it relates to those retirement plans.  The CARES Act, signed on Friday March 27, 2020, expanded access to retirement plan assets by qualified individuals.  This letter is designed to bring you current with what you need to know regarding these changes.

We cover the information by categories, discussing which people have expanded access, what time frame is involved, which types of plans are available for those withdrawals, how amounts have increased, what other waivers may apply, and the time frames for tax outcomes and/or return of funds to the plan.

Which People?

For purposes of the C-19 related retirement plan distributions, (CRD’s) any person who has been diagnosed with C-19, whose spouse or dependent has been diagnosed with C19, who has experienced adverse financial consequences as a result of C-19, been unable to work due to lack of child care as a result of C-19, or other reasons deemed appropriate by the IRS, has expanded access to their retirement plan assets.  In other words, most people will have expanded access.

Note that the CARES Act doesn’t specify that a qualified individual, or QI for our purposes, be an employee of the plan sponsor.  They need only be a QI with a vested balance in the plan.

What Time Frame?

This expanded access and related benefits are for calendar/tax/plan year 2020.

Which Types of Plans?

Plans eligible for this expanded treatment include IRAs, 401(k)’s, profit-sharing plans, 403(b)’s, and 457 or Top-Hat plans.

What Funds Are Available?

Individuals can access funds through either loans or distributions.  Under the CARES Act, loans (CRLs) may be as much as 100% of the individual’s vested balance, to a maximum of $100,000.  Loan repayment can be deferred for up to twelve months, stretching the usual five-year repayment period to six years.  Distributions can be 100% of vested account balance, up to a maximum of $100,000.  Such distributions are free from the 10% tax penalty, have no mandatory tax withholding, and have a three-year time frame for either return of funds to the or a plan, or to take proceeds as taxable income.

Loans

If the plan allows loans up to the pre-CARES stated maximum, it is likely the plan will need to be amended to allow for loans to the CARES Act limit.  If the loan language includes loans by reference, such as “up to the loan limit allowed by Section 72(p)”, then it is likely no amendment would be necessary.  As a plan sponsor, you would need to review your document or SPD, or talk to your TPA or benefits attorney to get guidance specific to your plan, for such Coronavirus related loans, or CRLs.

If the plan does not allow loans and you want to make them available, or if you would need to amend to accommodate CARES language, you have until the end of the 2022 plan year to make such plan amendments.

Action Item

Choose whether to add loan feature, or to amend plan to allow CARES Act loan features.

Distributions

Typically, plan distributions are limited to those for participants who have reached age 59.5, or in the event of termination, hardship, or death or disability of a participant.  Therefore, plans will need to be amended to facilitate CRD distributions, with plan sponsors having until the end of plan year 2022 to amend the plan.  QI’s self-certify the need, meaning that there is no mechanism stated or envisioned in the CARES Act to have employers confirm that such QI’s qualify for the stated distribution.

In practice, we find that TPAs are taking two approaches.  Some are sending communication to plan sponsors, announcing that they are amending for CRD’s, unless plan sponsors respond and ask for the plan not to be amended.  In other words, a negative election.  Other TPAs are letting plan sponsors know they are willing to amend, though the plan sponsor must take action by notifying the TPA, if they want the plan to be amended.  And, most financial institutions and TPAs which manage the participant elements of a plan have developed CARES specific documentation and are asking participants to call them directly.  This eases the burden on plan sponsors and allows for appropriate documentation for all parties.

Action Item

Determine that you as plan sponsor want to amend the plan for CRD distributions.  Be attentive to communication from the financial institution which manages your plan, for action they are taking relative to CRDs and CRLs.

If a QI otherwise qualifies for a distribution, they may take such distribution, and deem it a CRD distribution, subject to the new rules as enumerated in the CARES Act.

Profit-Sharing Plans

Profit-sharing plans are authorized by the code and related regulations to permit distribution upon the occurrence of a stated event.  A sponsor of a profit-sharing plan could therefore amend the plan to include the C-19 as a “stated event”.  This would permit CRD distributions from the plan.

Required Minimum Distributions

Note that under the CARES Act, all RMDs are waived for 2020.  Per the SECURE Act, signed into law in December 2019, the age for the first RMD is now age 72.  Therefore, those who would otherwise be required to take a distribution in 2020 from their retirement plan can waive the taking of these dollars.  The benefit is that these dollars taken as required distributions are taxable as income, unless given to charity as a Qualified Charitable Distribution.

Summary

There is so much more, and many questions, regarding the details of how this works.  These two pages are simply a summary.  If you have questions, or would like to visit more about your plan, please call or email.  During this quiet time, the best phone number for me is 678.478.5781, and the best number for Sandy is 404.538.2062.

Until we see you again, we are wishing you health, safety, and prosperity.

Warm regards,

Randy Brunson