CARES Act Impact on Employee Benefit Plans

By Robert J. Behr, CPA | April 6, 2020

As part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), there are several provisions that impact both 401(k) and 403(b) employee benefit plans.  These changes are designed to provide much-needed relief with respect to the COVID-19 crisis. 

Here are the key provisions that employers and plan administrators should know: 

  1. Employer contributions to single-employer defined benefit plansDefers 2020 minimum required contributions (including quarterly contributions) for single-employer plans to January 1, 2021. The amount of any deferred contributions is increased by interest accruing for the period between the original due date for the contribution and the payment date, at the effective rate of interest for the plan for the plan year which includes such payment date. 
  2. COVID-19 withdrawals Allows “Qualified Individuals” to take COVID-19 related distributions up to $100,000 of their vested account balance from their retirement plan or IRA without a 10% early withdrawal penalty. In addition, the 20% automatic tax withholding is not required.  A Qualified Individual is any participant who either:  (a) Is diagnosed with the virus, (b) The spouse or dependent of someone is diagnosed with the virus, (c) Is out of work, laid off, or has work hours reduced because business is shut down due to the virus, or (d) Is unable to work due to lack of childcare as a result of the virus.  These distributions can be taken up to December 31, 2020. Any resulting income inclusion can be taken over three years or any coronavirus-related distributions may be repaid within three years. The plan administrator may rely on an employee’s certification that the employee satisfies the conditions for a coronavirus-related distribution. 
  3. Required minimum distributions (RMDs) Required minimum distributions that otherwise would have to be made in 2020 from defined contribution plans (such as 401(k) plans) and IRAs are waived. This includes distributions that would have been required by April 1, 2020, due to the account owner’s having turned age 70 1/2 in 2019 and elected to delay their first distribution until April 1, 2020.
  4. Participant loans – Changes to maximum loan amounts and repayment extensions for Qualified Individuals.
    • Participants can borrow up to $100,000 (increase from $50,000) or 100% (increase from 50%) of their vested balance from qualified plans.
    • Plan loans outstanding on or after March 27, 2020 with repayment dates scheduled from March 27, 2020 through December 31, 2020 may be delayed for one year.

McClintock & Associates will continue to monitor any additional changes related to the CARES Act and assist with any questions you may have on the provisions above.