CARES Retirement Plan Changes

In response to COVID-19, Congress has made significant changes to retirement plan rules and the IRS has extended certain tax filing and payment deadlines.

The Coronavirus Aid, Relief, and Economic Security Act (CARES) Retirement Plan Rules Changes

Penalty-Free Hardship Distributions from Retirement Plans

Under the CARES Act, the 10% early distribution penalty is waived on early withdrawals up to $100,000 from a retirement plan or IRA made any time in 2020 that otherwise would have applied to individuals before turning age 59 ½. Qualifying individuals need to meet the following conditions:

• The individual is diagnosed with COVID-19
• The spouse or dependent of the individual is diagnosed with COVID-19
• The individual experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, reduced work hours or is unable to work due to child-care issues
• Business owner has reduced operating hours due to COVID-19 in the business that the business owner is working in, or
• The individual is impacted by other factors determined by the Treasury Secretary 

A covered distribution is taxable income, which can be recognized over a three-year period. Distributions can be repaid tax-free to the plan over three years and are not subject to retirement plan contribution levels.  Eligible retirement plans include individual retirement accounts, qualified pension, profit-sharing, or stock bonus plans (including 401(k) plans), qualified 403(a) annuity plans, 403(b) annuity contracts and custodial accounts, and governmental 457 (b) plans.

Plan Loans Increased to $100,000

The Act increased retirement loan limits to qualified individual plan participants (see above, the same requirements as the penalty-free hardship distributions apply) from $50,000 to the lesser of $100,000 or 100% of the participants vested balance. The loan must be taken within 180 days of the date of enactment. Qualified individuals with existing plan loans with repayment due between the date of enactment (March 27) and through December 31, 2020, can delay their payment(s) for up to one year. Deferred loan payments will be adjusted to reflect the prior delayed due date and any interest accrued during the delay. The one-year delay does not count towards the five-year maximum loan period. 

Required Minimum Distributions (RMD) Rules Waived

The Act waived RMD rules for IRAs and defined contribution plans (not defined benefit plans) for the calendar year 2020, including the initial RMD for those who reached 70 ½ in 2019 and for beneficiaries who have inherited tax-deferred or Roth accounts.RMDs made in 2020 that now qualify for a waiver and are still within the 60-day time period of the distribution can be rolled back into a qualified plan or IRA to avoid 2020 taxation.

Delay in Defined Benefit Plan Funding 

Single-employer defined benefit plans can delay the due date for funding contributions, including quarterly contributions that were due during 2020 until January 1, 2021. Contributions that are not made between March 27 and December 31, 2020, must be with interest. 

Plan Amendments

It is optional that plan sponsors adopt corona related hardship withdrawal distributions and/or increased plan loan limits. Plans can amend immediately to provide for these measures, or they can amend retroactively for the hardship distribution and loan provisions. Amendments can be made until the last day of the first plan year beginning on or after January 1, 2022, as long as the plans are operated as if the amendments were in place from their effective date. Government plans have an additional two years to amend.

IRS Deadline Extensions 

The IRS recently issued Notice 2020-23, expanding on previously issued guidance extending certain tax filing and payment deadlines in response to the coronavirus (COVID-19) crisis. This guidance applies to specified filing obligations and other “specified actions” that would otherwise be due on or after April 1, 2020, and before July 15, 2020. It extends the due date for specified actions to July 15, 2020.Specified actions include any “specified time-sensitive action” listed in Revenue Procedure 2018-58, including many relating to employee benefit plans. The relief applies to any person required to perform specified actions within the relief window, and it is automatic — your business does not need to file any form, letter, or other requests with the IRS.Filing extension requests beyond July 15, 2020, may be sought using the appropriate extension form, but the extension will not go beyond the original statutory or regulatory extension date. Below are some highlights of Notice 2020-23 specifically related to employee benefit plans:

Form 5500

The relief window covers Form 5500 filings for plan years that ended in September, October, or November 2019, as well as Form 5500 deadlines within the window as a result of a previously filed extension request. These filings are now due by July 15, 2020. Notably, the relief window does not include the July 31, 2020, due date for 2019 Form 5500 filings for calendar-year plans. Those plans may seek a regular extension using Form 5558.

Retirement Plans

The extended deadlines apply to correcting excess contributions and excess aggregate contributions (based on nondiscrimination testing) and excess deferrals. They also apply to:

• Plan loan repayments,
• The 60-day timeframe for rollover completion, and
• The deadline for filing Form 8955-SSA to report information on separated plan participants with undistributed vested benefits.

The relief for excess deferrals is a change from previous guidance, indicating that 2019 excess deferrals were still required to be corrected by April 15, 2020. In addition, while loan relief is already available to certain individuals for specified reasons related to COVID-19, this relief appears to apply more broadly — albeit for a shorter period. The Form 8955-SSA due date is the same as for the plan’s Form 5500, so the extension applies in the same manner.

Health Savings Accounts (HSAs)

The notice extends the 60-day timeframe for completing HSA or Archer Medical Savings Account (MSA) rollovers. It also extends the deadline to report HSA or Archer MSA contribution information by filing Form 5498-SA and furnishing the information to account holders. The regular deadline for the 2019 Form 5498-SA would be June 1, 2020, placing it squarely within this relief period.

Retirement Plan Rules

Plan sponsors should quickly review provisions made under the CARES Act and decide which provisions to implement and how to communicate them to plan participants. 

IRS Filing

Business owners and their plan administrators should carefully review Notice 2020-23 in conjunction with Revenue Procedure 2018-58 to determine exactly what relief may be available. For example, the revenue procedure covers various cafeteria plan items, but many deadlines may fall outside the notice’s window. We can provide you with further information about this or other forms of federal relief.