CARES Act Q&A
Having just finished reading an epic piece (30 pages!) from S. Derrin Watson on the CARES Act retirement plan and related provisions, I thought a CARES Act Q&A on the top the five questions that appear to be tripping people up the most might be in order. The answers are based on the collective wisdom of Derrin, myself and many other retirement plan compliance experts whose pieces I’ve read.
Before we dive in, there are a few caveats: For the plan sponsors out there, the experts aren’t always right, particularly about your own individual plan situation, so this is not a substitute for the advice of the expert legal counsel who works with your particular retirement plan(s). Also, we are only a few weeks into interpreting the CARES Act, so these answers are subject to change, particularly if further guidance is issued.
- Q: Do the CARES Act COVID-19 distribution provisions apply to money purchase plans?
A: I’ll admit that this one was a head-scratcher for me for a while, since the CARES act includes what appears to be some odd and potentially contradictory Code references. However, after reading commentary from Derrin and other experts, I am confident that the COVID-19 distributions apply to money purchase plans (MPPs). However, unlike other types of plans, the normal distribution requirements for money purchase plans remain in effect. For example, MPPs do not permit an individual under the age of 59½ from receiving an in-service distribution, and even if the plan allowed for COVID-19 distributions, only active employees who are 59½ or older could take advantage. As an aside, for MPPs that allow loans, the COVID-19 loan provisions would apply and could be adopted by MPP plan sponsors.
- Q: Do the CARES Act COVID-19 distribution provisions apply to 457(b) plans?
A: In terms of 457(b) plans, the COVID-19 distribution provisions only apply to governmental 457(b) plans. For private tax-exempt 457(b) plans, the COVID-19 provisions are not applicable; thus the participant would need to prove that he/she has an “unforeseeable emergency” in order to receive a distribution, if permitted by the plan. Note that 457(b) plan distributions are not subject to a 10% premature distribution penalty, whether due to COVID-19 or not.
- Q: Is it true that if I experience a reduction in work hours due to COVID-19, I can qualify for a COVID-19 distribution, but if I experience a reduction in salary, I don’t?
A: Yes. Absent of any future IRS guidance, this is indeed true. The CARES Act specially allows for COVID-19 distributions due to a reduction in hours (or a furlough, layoff, quarantine, inability to work due to providing childcare, or closing/reducing hours of a business operated by the individual) but NOT for a salary reduction.
- Q: If the plan permits COVID-19 distributions and loans, and a plan participant self-certifies that he/she has a valid COVID-19 reason to take advantage of the expanded distribution/loan provisions, what happens if the plan sponsor has knowledge that is contrary to the certification?
A: In this scenario, the COVID-19 distribution/loan should still be permitted if the plan sponsor is relying on participant self-certification (this is an optional provision; the plan sponsor can rely on the participant’s self-certification, but is not required to do so). Unlike hardship distributions, where a participant’s self-certification cannot be relied upon if the plan sponsor has actual knowledge that is contrary to the certification, COVID-19 certifications contain no such restriction.
- Q: What happens to a Required Minimum Distribution (RMD) that was taken prior to the enactment of the CARES Act?
A: The CARES Act makes It clear that distributions taken prior to January 1, 2020 are not eligible for the waiver, even if they were initial RMDs for 2019 that were not due until April 1, 2020.
However, the situation is a bit less clear for distributions that were already taken in 2020. Since the RMD requirements under the Code do not apply in 2020, technically what was an RMD is now eligible for rollover, so the distribution can be rolled into another plan or back to the plan from which the rollover was taken. However, under the indirect rollover rules, this can only be done within 60 days of the distribution, a deadline that was recently extended to July 15th for distributions taken on or after February 1st. However, distributions from January cannot be remedied in this way, unless the participant qualifies for a COVID-19 distribution, in which case the distribution can be repaid within three years. Confused? Hopefully the IRS will step in to provide some guidance in this regard, as it did the last time this happened in 2009.
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.
Investment products available through Cammack LaRhette Brokerage, Inc.
Investment advisory services available through Cammack LaRhette Advisors, LLC.
Both located at 100 William Street, Suite 215, Wellesley, MA 02481 | p 781-237-2291