CARES Act Relief Bill: Retirement Plan Provisions and Economic Impact

On March 27, 2020, the House passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2.2 trillion dollar relief bill to counter the economic impact of the COVID-19 pandemic. The bill was passed by the Senate on March 26th and will become law, as soon as it is signed by the President.

Impact on Retirement Plans

The legislation contains several retirement plan-related provisions that should prove helpful to plan sponsors in their attempt to deal with the implications of the pandemic.

Retirement plans/IRAs can permit COVID-19-related distributions, with favorable tax treatment

The CARES Act waives the 10% early withdrawal penalty tax for distributions of up to $100,000 per year from retirement plans/IRAs. The legislation allows retirement plans to permit distributions for individuals certifying that they meet one of the following conditions:

  • Diagnosed with COVID-19
  • Spouse or dependent diagnosed with COVID-19
  • Experience adverse financial consequences as a result of being quarantined, furloughed, laid-off, reduced work hours, inability to work due to lack of child care because of COVID-19, the closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors, as determined by the Treasury Secretary (which, as we understand, will be quite flexible)

Tax on the income from the distribution can be paid ratably over a three-year period. Individuals also have the ability to repay the amount into the plan over the next three years (presumably filing for a tax deduction on the taxes they will have paid as a result of the distribution). Those repayments are not subject to retirement plan contribution limits.

It should be noted that even though the distribution can be paid back to the plan, it is not an eligible rollover distribution; thus, it is not subject to the 20% withholding for payment of taxes. Thus, a participant can receive the entire amount of the distribution or elect to withhold taxes, subject to recordkeeper restrictions.

Finally, COVID-19 distributions are not considered hardship distributions. Instead, it is in its own new category of distribution for retirement plan purposes, so none of a plan’s hardship restrictions apply. Therefore, a plan can allow for this type of distribution even if it does not permit hardship distributions.

Loan limits can be increased, and participants can delay existing loan repayments

Retirement plan sponsors can double the current retirement plan loan limits to the lesser of $100,000 or 100% of the participant’s vested account balance in the plan, but only for individuals affected by COVID-19, as described above. It is important to note that this is an optional provision; plan sponsors can also elect to keep existing loan limits in place.

Loan repayment due dates, from the date of enactment of the Act (expected in the next day or two) through December 31, 2020, are extended by one year, with the term of the loan being extended by one year as well. Participants may still elect to pay their loans on time, but they will not be penalized if they are up to one year late for each payment due during this period.

Changes to loan repayment schedules will likely require significant effort to execute, on the part of retirement plan recordkeepers. Thus, plan sponsors should work with their recordkeeper(s) to confirm how quickly the provision can be administered.

Required Minimum Distributions (RMDs) are waived for 2020

RMDs for retirement plans and IRAs, which were quite complicated for 2020 due to the SECURE Act changes, are waived for this year. Participants who have already taken their 2020 distribution cannot repay it to the plan or otherwise roll it over. Thus, they will be responsible for the taxes due on that distribution for 2020.

The Department of Labor (DOL) can postpone deadlines due to COVID-19

Prior to this Act, the DOL could delay deadlines for requirements (such as Form 5500 filings), as a result of terrorism or military action. With the CARES Act, the DOL can also postpone deadlines for public health emergencies. Note that the DOL has not actually postponed the Form 5500 submission deadline for 2019 (which, for calendar year plans, is July 31st, 2020, unless extended to October 15th by the plan sponsor), but this gives them the ability to do so.

Delayed contributions for defined benefit (DB) plans

Single-employer defined benefit plans may delay the due date for any contribution otherwise due during 2020. On January 1, 2021, contributions for 2020 are due with interest.

A DB plan’s status for benefit restrictions, as of Dec. 31, 2019, will apply throughout 2020, such that a plan sponsor may elect to treat the plan’s adjusted funding target attainment percentage for the last plan year ending before Jan. 1, 2020 as the adjusted funding target attainment percentage for plan years which include calendar year 2020.

The CARES Act provides for the immediate adoption of these provisions, even if the plan does not currently allow for in-service distributions or loans, provided that the plan is amended on or before the last day of the first plan year beginning on or after Jan. 1, 2022 (January 1, 2024 for governmental plans), or later, if prescribed by the Treasury Secretary. Simply put, plan sponsors can make changes now and amend their plans later.

This bill was fast-tracked in order to provide COVID-19 assistance as quickly as possible, thus, there may be technical corrections to the Act issued to address any drafting mistakes that may have been made in the rush to enactment. Additionally, the CARES Act provisions are subject to modification pending any regulatory guidance issued. However, for now, plan sponsors should work closely with their trusted advisers and recordkeepers to discuss efficient implementation of the relevant CARES Act provisions.

Other Assistance

Beyond retirement, the CARES Act provides much needed relief for individuals and businesses affected by the COVID-19 pandemic. Some of these general provisions include:

  • One-time direct payments to Americans of $1,200 per adult earning up to $75,000 per year and $2,400 to a married couple earning up to $150,000 per year, with $500 payments per child.
  • An increase in unemployment insurance of $600 per week, added onto the standard state jobless payments, through the end of July, and significant expansion of unemployment eligibility requirements
  • Monetary assistance and tax relief to both large and small businesses, as well as healthcare entities and state and local governments
  • A tax-free student loan repayment benefit that permits employers to provide up to $5,250 in student loan repayment assistance
  • Changes to health insurance provisions to facilitate COVID-19 treatment

A major point of disagreement in the bill for Democrats and Republicans was the amount of relief for workers and the oversight over the $500 billion in corporate aid, much of which will go toward backstopping Federal Reserve loans. The two parties ultimately agreed to create an oversight board to monitor the corporate aid.

Is the Stimulus Good Enough?

The stimulus package should help Americans impacted by the COVID-19 pandemic over the course of the next six to eight weeks. During that time, no one should be evicted, student loan payments are suspended, and many Americans will be provided funds to help obtain the essentials.

Depending on the duration of the pandemic and the spread of the virus, American households may need additional relief. While there is hope that the virus will peak in the coming weeks, the concern over whether the economy can simply be “turned back on” remains a major point of uncertainty. However, this relief package should calm the immediate economic concerns of vulnerable Americans, until we have a clearer picture of how the virus has spread.

The Economic Impact

Despite the news of 3.2 million unemployment claims in March, equity markets continued their three-day rally, with stocks closing positive on Thursday, March 26 – due in large part to the likely passage of the much-anticipated stimulus package. There is little debate that without these sweeping measures on the part the government, there would be massive unemployment and despair in the United States.

From a fiscal standpoint, the federal government will be drastically expanding its budget deficit to deal with the crisis, from $1.1 trillion, or 4.9% of Gross Domestic Product (GDP), to 10% to 12% GDP (NY Times). However, this is not the first time the federal government has engaged in deficit spending to handle a crisis. The Federal Reserve (Fed) has also cut its overnight rate to zero, which allows the federal government access to inexpensive borrowing. While the CARES Act is not a permanent increase in government spending, it is possible that there may need to be additional expenditure.

When Americans finally do go back to work and the country begins to return to its pre-Coronavirus growth, high unemployment (low production) and high consumer demand could spur inflation or even “stagflation” (low growth and increasing prices). In this scenario, the Fed may need to raise interest rates and sell some of its Treasury bonds to curtail it.

Deflation, or falling prices, could be a more immediate issue. The price of oil (approximately $23 per barrel) is about one-third of where it began in 2020 (NY Times). Additionally, social distancing and other quarantine measures have put a damper on consumer demand, which could be deflationary.

Ultimately, the staggering deficit spending is preferable to allowing the economy to collapse. While the amount of the stimulus package is unprecedented, its ultimate success will likely depend on the spread of the virus.

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.

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