CARES ACT impact on 
RETIREMENT PLANS

Has special legislation affecting retirement plans and IRAs been enacted on account of the Covid-19 Pandemic?

Yes, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law March 27, 2020, and contains several provisions relating to retirement plans and IRAs. These questions and answers address major retirement plan and IRA provisions of the Cares Act and governmental agency announcements as well as pre-existing laws and regulations that employers and plan participants may want to consider during these difficult financial times. This is not a complete description of all laws, regulations, and guidance relating to affected retirement plans and IRAs. This information is provided for general information only and no employer or plan participant should rely upon it as pertaining to their particular situations. Employers and plan must obtain their own legal and accounting advice to determine whether laws, regulations, or guidance applies to them and their retirement plans or IRAs and for assistance in evaluating whether they may benefit from provisions, and if adopted or followed, the required documentation and tax consequences. These Questions and Answers were prepared based on laws, regulations, and guidance available as of May, 11, 2020, and employers and individuals need to determine whether subsequent laws, regulations, and guidance affect the information provided here and the employer or individuals.

The CARES Act also contains the Paycheck Protection Program that provides small businesses (generally those with 500 or less employees) with potentially forgivable loans or resources to maintain payroll and benefits, hire back employees who may have been laid off, and to cover applicable overhead.

What are the most significant special rules for retirement plans and IRAs in of the CARES Act relating to individuals?

In general, the CARES Act provides for expanded distribution options and favorable tax treatment for up to $100,000 of coronavirus-related distributions from eligible retirement plans (certain employer retirement plans, such as section 401(k) and 403(b) plans, and for IRAs) to qualified individuals, as well as special rollover rules with respect to such distributions. It also increases the limit on the amount a qualified individual may borrow from an eligible retirement plan (not including an IRA) and permits a plan sponsor to provide qualified individuals up to an additional year to repay their plan loans.

Who is a qualified individual for purposes of expanded distribution options, favorable tax treatment for up to $100,000 of coronavirus-related distributions, special rollover rules, and increased borrowing from an eligible retirement plan?

To be “qualified” individual –

• You, your spouse, or dependent is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;
• You experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;
• You experience adverse financial consequences as a result of being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or
• You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.

Does the IRS intend to issue guidance that might expand the definition of “qualified persons” for the CARES Act?

Under the CARES Act, the Treasury Department and the IRS may issue guidance that expands the list of factors taken into account to determine whether an individual is a qualified individual as a result of experiencing adverse financial consequences. We know that the Treasury Department and the IRS are formulating guidance and anticipate releasing that guidance in the near future. IRS Notice 2005-92, issued November 30, 2005, provided guidance on the tax-favored treatment of distributions and plan loans under the Katrina Emergency Tax Relief Act of 2005 (“KETRA”). We understand that the Treasury Department and the IRS anticipate providing CARES Act guidance that will apply the principles of Notice 2005-92 to the extent the CARES Act is similar to provisions of KETRA. As of this writing, the date for issuance of such guidance is unknown.

Must qualified retirement plans be amended to provide for special provisions of the CARES Act?

According to current guidance, qualified retirement plans must be amended to provide for special provisions of the CARES Act; however, plans generally have an extended due date for amendment, if the plan is amended retroactively to permit qualifying distribution and loan provisions that were made (and may be made in the future) if the amendment(s) are adopted by the last day of the first plan year beginning on or after January 1, 2022, so long as the plan was operated as if the amendments were in effect from their effective date. However, qualified individuals may be able to treat a distribution that meets the requirements of a coronavirus-related distribution as coronavirus-related on the individual's federal income tax return even if the employer does not amend the plan. See the last sentence in the question "Is it optional for employers to adopt the distribution rules of the CARES Act?" below. However, if the plan does not provide for in-service distributions, it is unlikely that the employer or plan administrator will permit a distribution that is not authorized by the plan document.

What is a coronavirus-related distribution?

A coronavirus-related distribution is a distribution that is made from an eligible retirement plan to a qualified individual from January 1, 2020, to December 30, 2020, up to an aggregate limit of $100,000 from all plans and IRAs.

Does the 10% pre-mature distribution additional tax apply to a coronavirus-related distribution from a retirement plan or an IRA?

No, the 10% additional tax on premature distributions does not apply to any coronavirus-related distribution.

When are taxes on a coronavirus-related distribution due?

A coronavirus-related distribution is generally included in income ratably over a three-year period, starting with the year in which an individual receives a qualifying distribution. For example, if a plan participant receives a $9,000 coronavirus-related distribution in 2020, the participant would report $3,000 in income on her/his federal income tax return for each of 2020, 2021, and 2022. However, there is an option to include the entire distribution in income for the year of the distribution.

Can a coronavirus-related distribution be repaid?

All or part of the amount of a coronavirus-related distribution to an eligible retirement plan, provided that the repayment is completed within three years after the date that the distribution was received. A repayment of a coronavirus-related distribution will be treated as though it were repaid in a direct trustee-to-trustee transfer so that you do not owe federal income tax on the distribution.

For example, if a plan participant receives a coronavirus-related distribution in 2020, and chooses to include the distribution amount in income over a 3-year period (2020, 2021, and 2022), and also chooses to repay some or all of the full amount to an eligible retirement plan in 2022, the participant may file amended federal income tax returns for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution included in income for those years, and will not be required to include any amount in income in 2022.

Is an eligible retirement plan required to accept repayment of a participant's coronavirus-related distribution?

No, unless the plan accepts rollover contributions. That is, repayments of coronavirus-related distribution are to be treated as rollover contributions. However, a qualified retirement plan is not required to accept rollover contributions. Therefore, if the plan does not accept any rollover contributions, the plan is not required to change its terms or procedures to accept repayments coronavirus-related distributions.

Is it optional for employers to adopt the distribution rules of the CARES Act?

Employers have the option to adopt the special distribution rules provided by the CARES Act. The employer is permitted to choose whether, and to what extent, to amend its plan to provide for coronavirus-related distributions that satisfy the CARES Act.

For example, an employer may choose to provide for coronavirus-related distributions but choose not to change its plan loan provisions or loan repayment schedules. NOTE, however, the IRS has said that even if an employer does not treat a distribution as coronavirus-related, a qualified individual may treat a distribution from a 401(k) plan, a 403(b) plan, or a governmental 457(b) plan, that meets the requirements to be a coronavirus-related distribution as coronavirus-related on the individual's federal income tax return.

Does the CARES Act provide additional distribution rights to participants or otherwise change the rules applicable to plan distributions?

A CARES Act coronavirus-related distribution is treated as meeting the in-service distribution restrictions for 401(k), 403(b), and governmental section 457(b) plans.
For example, under the CARES Act, a 401(k) plan may permit a coronavirus-related distribution, even if it would occur before an otherwise permitted distributable event (such as severance from employment, disability, or attainment of age 59½). However, the CARES Act does not otherwise change the limits on when plan distributions are permitted to be made from qualified retirement plans. For example, a pension plan (such as a money purchase pension plan or a defined benefit pension plan) is not permitted to make a distribution before an otherwise permitted distributable event merely because the distribution, if made, would qualify as a coronavirus-related distribution. Further, a pension plan is not permitted to make a distribution under a distribution form that is not a qualified joint and survivor annuity without spousal consent merely because the distribution, if made, could be treated as a coronavirus-related distribution.

May a plan administrator rely on an individual's certification that the individual is eligible to receive a coronavirus-related distribution?

A plan administrator of an eligible retirement plan may rely on an individual's certification that the individual satisfies the conditions to be a qualified individual in determining whether a distribution is a coronavirus-related distribution, unless the administrator has actual knowledge to the contrary. Although an administrator may rely on an individual's certification in making and reporting a distribution, the individual is entitled to treat the distribution as a coronavirus-related distribution for purposes of the individual's federal income tax return only if the individual actually meets the eligibility requirements.

How do qualified individuals report coronavirus-related distributions?

A qualified individual may designate any eligible distribution as a coronavirus-related distribution as long as the total amount designated as coronavirus-related distributions is not more than $100,000. A qualified individual may treat a distribution that meets the requirements to be a coronavirus-related distribution as such a distribution, regardless of whether the eligible retirement plan treats the distribution as a coronavirus-related distribution. A coronavirus-related distribution will be reported on the individual’s federal income tax return for 2020. The taxpayer must include the taxable portion of the distribution in income ratably over the 3-year period – 2020, 2021, and 2022 – unless an election is made to include the entire amount in income in 2020. The IRS expects to issue Form 8915-E which must be filed whether or not the individual is required to file a federal income tax return. Taxpayers will also use Form 8915-E to report any repayment of a coronavirus-related distribution and to determine the amount of any coronavirus-related distribution includible in income for a year.

What if an individual’s total coronavirus-related distributions exceed $100,00.00?

The waiver of the 10% premature distribution penalty and possibility of repayment (if permitted by the plan) only applies to coronavirus-related distribution up to $100,000 made on or after Jan. 1. until Dec. 31, 2020.

How do plans and IRAs report coronavirus-related distributions?

The payment of a coronavirus-related distribution to a qualified individual must be reported by the eligible retirement plan on Form 1099-R. This reporting is required even if the qualified individual repays the coronavirus-related distribution in the same year. More information on how to report these distributions is expected to be published by the IRS later this year.

Are Required Minimum Distributions affected by the CARES Act?

Yes. The CARES Act provides a temporary waiver of required minimum distribution rules for certain individual retirement account plans (including 401(k), 403(b), and governmental 457(b) plans., and SEP IRAs, SIMPLE IRAs, and traditional IRAs) for calendar year 2020. The waiver applies to distributions otherwise required for 2020 and to distributions for 2019 that were due by a required beginning date in 2020 and not paid in 2019; i.e., for a person who attained age 70 ½ in the second half of 2019. The waiver does not alter a participant’s required beginning date for purposes of applying the minimum distribution rules in future years.

What plan loan relief is provided by the CARES Act?

The CARES Act permits an additional year for repayment of loans from eligible retirement plans (not including IRAs) and relaxes limits on loans.

• Certain loan repayments may be delayed for one year: If a participant loan is outstanding on or after March 27, 2020, and any repayment on the loan is due from March 27, 2020, to December 31, 2020, that due date may be delayed under the plan for up to one year. Any payments after the suspension period will be adjusted to reflect the delay and any interest accruing during the delay.

• Loan limit may be increased: The CARES Act also permits employers to increase the maximum loan amount available to qualified individuals. For plan loans made to a qualified individual from March 27, 2020, to September 22, 2020, the limit may be increased up to the lesser of: (1) $100,000 (minus outstanding plan loans of the individual), or (2) the individual's vested account balance under the plan.

Is it optional for employers to adopt the loan rules of the CARES Act?

Employers have the option to adopt the special loan rules provided by the CARES Act. The employer is permitted to choose whether, and to what extent, to amend its plan to provide for coronavirus-related loans, modifications, and/or interest recalculations that satisfy the CARES Act.

For example, an employer may choose to provide for coronavirus-related loan limits but choose not to change plan loan repayment schedules.

What are the CARES Act Paycheck Protection Program’s (“PPP”) provisions relating to retirement plan contributions?

The Paycheck Protection Program authorizes up to $349 billion in forgivable loans to small businesses to pay their employees during the COVID-19 crisis. The loan amounts will be forgiven as long as:

• The loan proceeds are used to cover payroll costs, and most mortgage interest, rent, and utility costs over the 8-week period from the date the loan is made; and
• Employee and compensation levels are maintained.

Generally, payroll costs are capped at $100,000 on an annualized basis for each employee. Not more than 25% of the forgiven amount may be used for non-payroll costs such as rent, utilities, etc.

Contributions to an employer’s qualified retirement plan are considered “eligible payroll” costs for the purpose of the PPP.

Does the $100,000.00 limit on compensation apply when computing an employer’s contribution to a retirement plan?

While the CARES Act generally excludes from the definition of payroll costs any employee compensation in excess of an annual salary of $100,000, the exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including employer contributions to defined-benefit or defined-contribution retirement plans. This makes calculations of the costs of benefits or contributions much simpler than if the exclusion applied.

Is a contribution that comes from a PPP forgivable loan tax deductible?

Usually, payroll including retirement plan contributions are deductible, and forgiven debt counts as taxable income. Under the Cares Act, PPP loan forgiveness is not counted as taxable income. Citing Section 256 of the Internal Revenue Code, the IRS has issued guidance that expenses that result in forgiveness of a PPP loan are not tax deductible in order to prevent a "double tax benefit."

May an employer cut back or eliminate 401(k) matching contributions?

Much will depend on how the employer’s 401(k) plan is worded. If the plan provides that the amount and timing of employer matching contributions are discretionary, and contains a last day of the year employment requirement, then the employer may safely reduce or eliminate matching contributions before the end of the plan year. In this case, matching contributions are really a form of discretionary profit-sharing contribution and no participant is “entitled” to a contribution until the employer declares one for the year. However, a prudent employer should notify employees of its intent or decision to reduce or eliminate matching contributions. BUT NOTE, matching employer contributions are often made on a payroll-by-payroll basis and, once allocated to a participant’s account are considered to be part of the participant’s accrued benefit that cannot be reduced. Where this is the case, a retroactive amendment is not possible; but matching contributions could be eliminated going forward.

If the plan provides for a stated matching contribution, does not currently contain a last day of the year employment requirement, and the plan is not “a safe-harbor matching contribution plan,” an employer could reduce or eliminate future matching contributions through a plan amendment. The employer will need to notify participants of the plan amendment and its effective date and update its Summary Plan Description (SPD) and distribute updated SPDs to all eligible employees, not only those currently making 401(k) elective deferrals.

Matching employer contributions are often made on a payroll-by-payroll basis. Where this is the case, a retroactive amendment removing allocated contributions (or contributions that are due under the matching formula) is not possible.

If the plan is “a safe-harbor matching contribution plan,” it’s more complicated. Generally speaking, the safe harbor rules do not allow for changes during the plan year. However, in light of the economic downturn in 2008 and 2009, the IRS has since issued regulations permitting reduction or suspension of safe harbor matching contributions (or safe harbor non-elective contributions) after a 30-day period if the employer:

• provides employees with a supplemental notice to the annual safe-harbor notice that was given before the beginning of the plan year of the reduction or suspension of safe-harbor contributions;
• provides affected participants advance opportunity to change their elective contributions; and
• amends the plan to make elective and matching contributions subject to ACP and ADP testing for the year, applying the current year testing method.

In order to be eligible to reduce or suspend safe harbor contributions, the employer must be “operating at an economic loss” or the employer reserved the right to suspend or reduce contributions during the year in its annual safe harbor notice. If neither of these conditions apply, the employer must make the promised safe-harbor contributions. The only alternative would be to terminate the plan which will result in all participates being 100% vested in the account balances.