CARES Act updates for plan sponsors
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed by the president on March 27, 2020. The CARES Act includes several provisions intended to loosen restrictions on, and reduce the tax consequences of, distributions and loans from retirement plans. Also included are rules waiving required minimum distributions from 403(b) plans for the 2020 calendar year.
CORONAVIRUS RELATED DISTRIBUTIONS
Coronavirus Related Distributions (CRD) may now be made from 403(b) retirement plans. The distribution can be made whether or not the participant is otherwise eligible for a distribution under the terms of the plan.
CRDs are defined as any distribution made from an eligible retirement plan on or after January 1, 2020, and before December 31, 2020, to either one of these options:
- An individual who is, or whose spouse or dependents are, diagnosed with the coronavirus or with coronavirus disease (COVID-19) by a test approved by the Centers for Disease Control and Prevention.
- An individual who is financially harmed by the coronavirus or coronavirus disease as a result of (i) being laid off, furloughed, receiving reduced work hours, or quarantined, (ii) being unable to work because of a lack of child care, (iii) having to close or reduce the operation hours of a business owned or operated by the individual, or (iv) such other reasons as determined by the Secretary of the Treasury.
The 10% federal penalty on early distributions imposed under IRC 72(t) will not apply to Coronavirus Related Distributions made to plan participants on distributions up to $100,000. A plan sponsor may rely on the plan participant’s certification that they are a qualified individual (as described above) in order to receive a CRD. CRDs are not subject to mandatory 20% federal withholding. Rather, they are subject to a default 10% federal withholding unless elected otherwise by the participant.
Plan participants may also spread their tax liability or pay back their account over a three year period.
WAIVER OF REQUIRED MINIMUM DISTIBUTIONS (RMDs) FOR THE 2020 CALENDAR YEAR
RMDs are not required to be made in the 2020 calendar year from 403(b) plans. No immediate action is needed on part of the plan sponsors. If WEA Member Benefits provides your plan documents, we will be providing you additional information in the near future.
403(b) PLAN LOAN LIMITS AND MANDATORY DEFERMENT OF LOAN PAYMENT
For plans that allow loans, your 403(b) plan may now allow qualified individuals to borrow up to the lesser of $100,000 or 100% of their vested account balance. Additionally, if a qualified individual has a loan outstanding on or after March 27, 2020, the due date for any loan payment that is due between now and December 31, 2020, shall be delayed by one year. When payments resume, the loan schedule must reflect the extended due date of the deferred payments, including any interest accruing during the deferment.
Like the CRD, a qualified individual means either one of these options:
- An individual who is, or whose spouse or dependents are, diagnosed with the coronavirus or with coronavirus disease (COVID-19 by a test approved by the Centers for Disease Control and Prevention.
- An individual who is financially harmed by the coronavirus or coronavirus disease as a result of (i) being laid off, furloughed, receiving reduced work hours, or quarantined, (ii) being unable to work because of a lack of child care, (iii) having to close or reduce the operation hours of a business owned or operated by the individual, or (iv) such other reasons as determined by the Secretary of the Treasury.
Not all plans are required to offer participant loans or the larger loans permitted under the CARES Act. Unlike CRDs, CARES is silent on whether the plan sponsor can rely on the employee’s certification that he/she satisfies the above requirement for the purposes of these loan provisions. WEA TSA Trust will provide more information as it becomes available.
**IMPORTANT INFORMATION: If your plan does not currently allow for loans and you would like to amend your plan documents to allow for loans, please contact your Worksite Benefit Consultant.
PLAN AMENDMENT
If a plan offers Coronavirus Related Distributions or is subject to the CARES Act loan provision, it must be amended no later than the last day of the first plan year beginning on or after January 1, 2024, to reflect how the plan was operated.
WEA TSA Trust will provide further guidance for those utilizing a WEA TSA Trust-provided plan document. Plan sponsors with individually designed plans should discuss the content and timing of amendments with their document provider.
The 403(b) retirement program is offered by the WEA TSA Trust. TSA program registered representatives are licensed through WEA Investment Services, Inc., member FINRA.
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