Retirement Plan Services & Recent Legislation

by Todd Hughes, J.D. – Vice President & Retirement Services Officer

In response to the COVID-19 pandemic, Congress passed the CORONAVIRUS AID, RELIEF, AND ECONOMIC SECURITY ACT (CARES Act) on March 27, 2020. The bill provides financial aid for individuals and companies. The Act also has provisions allowing access to retirement savings and suspension of required minimum distributions. These provisions are summarized below:

Special Rules for Use of Retirement Savings

  • Waiver of the 10% early distribution penalty tax (distributions made before age 59½) for coronavirus-related distributions. The 10% penalty tax does not apply to coronavirus-related distributions up to $100,000 per individual (limit applied across all plans and IRAs).
  • The waiver applies to distributions from IRAs, 401(k) and other 401(a) plans, governmental 457(b) plans, and 403(b) plans.
  • A distribution can be repaid within three years of the date of distribution to any plan or IRA to which a rollover contribution can be made. Repayments will be treated as rollover contributions with no tax consequences.
  • Regular income taxes due on the distribution will be spread over three years unless the person taking the distribution elects otherwise. The 20% withholding is not required, and there is no requirement to provide a 402(f) notice or offer a direct trustee-to-trustee transfer.

A “coronavirus-related distribution” includes any distribution made in 2020 to a person who has one of the following: A personal diagnosis of COVID-19 by a test approved by the Centers for Disease Control and Prevention; A spouse or dependent who has been so diagnosed or; Adverse financial consequences due to being furloughed, quarantined or laid off or having their paid work hours reduced due to coronavirus, being unable to work due to lack of child care due to the virus, or the close or reduction of a business due to coronavirus.

An employer can rely on an employee’s certification that these conditions are satisfied and there still must be a distributable event such as termination of employment.

Special Rules for Retirement Plan Loans

  • The maximum loan amount for qualified loans is increased from $50,000 or 50% of the vested account balance to $100,000 or 100% of the vested balance. This increase applies to loans taken for a period of 180 days after date of enactment.
  • For any person who meets the coronavirus-related distribution definition (see above) who has an outstanding loan balance on or after the date of enactment and loan payments due from date of enactment through December 31, 2020, payments are delayed by one year (or, if later, 180 days after enactment).
  • All subsequent payments will be adjusted to take into account the delay and the interest accrued during the delay. The five-year loan limit may be disregarded for this purpose.
  • This applies to 401(k) and other 401(a) plans, 403(b) plans, and any governmental plans.
  • A qualified loan is any new or pre-existing loan to a person who would be eligible to receive a coronavirus-related distribution as defined above.

An employer can rely on an employee’s certification that these conditions are satisfied and the plan must allow for loans. The provisions above are optional. If implemented, the plan document must be amended by the last day of the 2022 plan year.

Temporary Waiver of RMDs

Any RMD required to be made in calendar year 2020 is waived. This includes RMDs due as a death benefit in accordance with the five- and 10-year rules, and those time limits are extended by one year.

If a distribution is made in 2020 that would have been treated as an RMD but for the 2020 waiver, it can be rolled over in accordance with the 60-day rollover rules (Note: Rollovers not eligible for inherited IRAs). This applies to 401(k), 403(b) and governmental 457(b) plans and IRAs.

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