In Sequoia’s continued efforts to take great care of you and your people through times like this, we offer information and insights anticipating heightened focus on participant retirement accounts given the unprecedented impact of the coronavirus (COVID-19). We are relieved to share that the much-anticipated Coronavirus, Aid, Relief and Economic Security (CARES) Act was passed on Friday, March 27th.
- CARES Act legislation permits plan sponsors to make CARES Act Distributions (also referred to as “qualifying coronavirus-related distributions”) available to participants.
- With the passing of this new legislation, retirement record keepers are working diligently to deploy the expanded features into retirement plans. Expect to hear from your account managers in the coming days with more information. However, please be conscious of making public announcements as participants may be encouraged to take distributions and siphon their retirement savings, rather than addressing a financial necessity in another manner. Employees in dire need will most likely be reaching out.
HIGHLIGHTS OF THE CARES ACT:
The CARES Act provides significant withdrawal relief for eligible participants for qualifying coronavirus-related reasons. These include adverse financial consequences due to being quarantined, furloughed, laid off or work hours reduced; being unable to work due to the lack of childcare; or closing or reducing hours of a business owned or operated by an individual.
Given the nature of the legislation, and to make the features available to participants as soon as administratively feasible, many retirement record keepers are implementing the CARES Act Distributions as pre-approved transactions with participant self-certification (unless explicit spousal consent is required for certain plans, in which case paperwork will be required). They will offer “negative consent” amendments where these provisions will go into effect unless the plan sponsor actively elects to opt out.
CARES Act distributions are more favorable than standard hardship withdrawals including those for Federal Emergency Management Agency (FEMA)-decared disasters because:
1) Coronavirus Related Distributions (CRD) allow –
- penalty-free distribution of up to $100,000 for qualifying coronavirus-related reasons;
- taxes owed on the income from the withdrawal may be paid over a three-year period;
- repayment of distributions withdrawn to an eligible retirement plan within three years and not be subject to the retirement plan contribution limits; and
- while CRDs must be made prior to 12/31/2020, the mandatory early withdrawal penalties and tax withholding requirements are waived.
2) Plan Loans
- The CARES Act doubles the current retirement plan loan limits to the lesser of $100,000 or 100% of the participant’s vested account balance in the plan.
- Individuals with an outstanding loan from their plan with a repayment due from the date of enactment of the CARES Act through Dec. 31, 2020, can delay their loan repayment(s) for up to one year.
3) Required Minimum Distributions (RMD) Waiver
- RMDs for 2020 are waived for all types of defined contribution plans (including 401(k), 403(b), and governmental 457(b) plans) and IRAs. No RMD waiver is available for defined benefit plans.
More Legislation to Come: In addition to the CARES Act, continued efforts are underway to call upon the Treasury Department to provide relief that helps employers facing significant financial burdens relating to the Coronavirus, especially for retirement plans with employer contribution funding obligations. Additionally, the CARES Act legislation provides the Department of Labor with expanded authority to postpone certain deadlines under ERISA. Actions they take still remain to be seen.
Read more on the non-retirement related features of CARES in our larger article The Coronavirus Aid, Relief and Economic Security (CARES) Act.
We at Sequoia are committed to providing resources and timely information to help you understand the landscape of regulatory and legislative actions. We continue to add information and resources on Sequoia’s COVID-19 Resource Center – https://www.sequoia.com/resources/covid-19/ – and are available to help address any questions from you or your employees.
The information and materials on this blog are provided for informational purposes only and are not intended to constitute legal or tax advice. Information provided in this blog may not reflect the most current legal developments and may vary by jurisdiction. The content on this blog is for general informational purposes only and does not apply to any particular facts or circumstances. The use of this blog does not in any way establish an attorney-client relationship, nor should any such relationship be implied, and the contents do not constitute legal or tax advice. If you require legal or tax advice, please consult with a licensed attorney or tax professional in your jurisdiction. The contributing authors expressly disclaim all liability to any persons or entities with respect to any action or inaction based on the contents of this blog.