The Coronavirus Aid, Relief, and Economic Security (CARES) Act allows plan participants in certain retirement plans (e.g., 401(k) plans) affected by the COVID-19 pandemic to have greater access to and flexibility with their retirement funds by:

• Providing a new plan distribution—the coronavirus-related distribution (CRD)—with fewer restrictions and more favorable tax treatment,
• Relaxing the qualified plan loan rules, and
• Waiving required minimum distributions (RMDs) from defined contribution plans and IRAs for 2020.

Here are the facts plan sponsors need to know.

The CARES Act’s provisions are available for retirement plan participants considered qualified individuals, as defined below: 

• A participant, spouse, or a dependent who is/was diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a Centers for Disease Control and Prevention-approved test, or
• A participant who, due to such virus or disease, suffers adverse financial consequences because of: 
  • Being quarantined, furloughed, laid off, or having his/her work hours reduced; or 
  • Being unable to work due to lack of childcare; or 
  • The closing or reduction of hours with respect to a business owned or operated by the individual; or 
  • Other factors as determined by the secretary of the Treasury (or the secretary’s delegate). 

With a CRD, qualified individuals may withdraw up to a total of $100,000 from their retirement plan accounts to cover financial shortfalls specifically related to the coronavirus. What’s important to know is: 

• This new distribution is separate from the new hardship allowance that addresses participant expenses and losses (including loss of income) incurred due to federally declared disasters.  
• A plan sponsor may choose to—but isn’t required to—offer CRDs to plan participants.
• Participants must only certify that they’re qualified individuals (i.e., no supporting evidence is required). 
• The distribution must occur by December 30, 2020.
• The maximum amount of $100,000 can be taken in one lump sum or in multiple payments.
• The 20% mandatory federal withholding doesn’t apply.
• The 10% early withdrawal penalty for distributions prior to age 59½ doesn’t apply.
• Participants may repay their CRDs to an eligible plan within three years in one lump sum or in multiple payments.
• Participants may spread the payment of income taxes on the CRD over three years. 

The CARES Act increases the loan limits and delays loan repayments for qualified individuals. 

Increased loan limits

• A plan sponsor may choose to—but isn’t required to—offer this provision.
• Participants must only certify that they’re qualified individuals (i.e., no supporting evidence is required). 
• Participants may borrow the lesser of $100,000 or 100% of their vested account, versus the current limits of the lesser of $50,000 or 50% of their vested account.
• The increased loan limits apply only for loans taken on or after March 27 (the date the CARES Act was enacted), and no later than September 22 (180 days following the date of enactment).

Delayed loan repayments

• Although further guidance is needed, it’s assumed that a plan sponsor must allow qualified individuals the ability to delay their loans.
• A participant may delay any plan loan repayment due on or after March 27, 2020, through December 31, 2020, for one year from its original due date. 
• This provision applies to all loans in repayment and in good standing, as well as to all new loans.
• The interest on the loan will continue to accrue during the delay period and will be added to the outstanding loan.
• The delay period can be added to the term of the loan.

The CARES Act waives the requirement that a participant receive an RMD in calendar year 2020. The reasoning behind this is that RMD amounts are based on the value of the account at the end of the previous year—in this case, December 31, 2019. Most accounts have probably experienced a significant decline in early 2020 due to market volatility. As a result, the amount of the RMD would be a much larger percentage of a retiree’s account. The CARES Act waiver lets retirees keep that money in their accounts, potentially recouping some of the market losses when the economy turns around.

Participants who have already received RMDs but don’t want the distributions may be able to recontribute the amount back into their retirement account—assuming the distribution qualifies for a rollover. It’s also possible that some type of transitional guidance will be issued—such as IRS Notice 2009-82 relating to the Worker, Retiree, and Employer Act of 2008 (WRERA)—which will permit the distribution, even if the plan wouldn’t otherwise.

Although the CARES Act didn’t arrive with much lead time, and clarifying guidance is still needed for some of the administrative aspects, plan sponsors may begin operating their plans in accordance with the CARES Act immediately. The deadline to amend retirement plans for any changes implemented under the CARES Act is generally the end of the first plan year beginning on or after January 1, 2022 (or, for governmental plans, the end of the first plan year beginning on or after January 1, 2024); however, terminating plans must be amended to reflect any provisions implemented prior to the plan’s termination.

For more background on how the new laws affect your plan, watch a replay of John Hancock’s “CARES Act legislative webcast” or review the other resources available on our COVID-19 web page. To be sure you’re prepared for these important changes, please talk to your retirement plan administrator, plan consultant, or financial professional.