On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security Act” or “CARES Act.” The CARES Act is a $2.2 trillion economic stimulus package aimed at providing financial relief to individuals and businesses adversely affected by the coronavirus pandemic.

The portion of the CARES Act that relates to retirement plans is found in Title II, Sections 2202 and 2203, which provide some new or improved avenues for accessing (and in one instance, preserving) retirement funds for a limited time.

Coronavirus-related Distributions

The CARES Act allows distributions from eligible retirement plans to “qualified individuals” during the period January 1 – December 31, 2020. (Thus, it is possible that distributions taken by participants prior to the Act’s passage could qualify as coronavirus-related distributions.)

Under the CARES Act, a “qualified individual” is defined as an individual:

1. who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention,
   
   
2. whose spouse or dependent is diagnosed with such virus or disease by such a test, or
   
   
3. who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease or other factors as determined by the Secretary of the Treasury.

As to a Coronavirus-related distribution, the CARES Act provides that:

1. the employer may rely on the employee’s own certification that they satisfy the requirements to be declared a qualified individual,
   
   
2. qualified individuals may take distributions of up to $100,000, free from the usual 10% penalty tax normally applied to early distributions,
   
   
3. the distribution will be taxed ratably over a three-year period as part of gross income unless the qualified individual elects otherwise, and
   
   
4. the distribution may be repaid to any qualified plan or IRA into which the employee would be able to make a rollover contribution, within three years of the distribution, in one or more payments.

This provision appears to be optional; however, keep in mind that some distributions under existing plan provisions could qualify as coronavirus-related distributions, and thus be exempt from the 10% early withdrawal penalty, even if a plan does not adopt this special distribution option. There are many unanswered questions about how this provision will apply in practice, especially respecting taxation and possible repayment; hopefully further guidance will be coming.

Loans from Qualified Plans

The CARES Act also increased the plan loan limits for new loans to “qualified individuals” taken during the 180-day period beginning on the date of its enactment:

1. the maximum loan a plan may allow is increased from $50,000 to $100,000, and
   
   
2. participants may borrow up to 100% of their vested plan balance instead of the usual 50% (subject to the overall $100,000 maximum).

Additionally, for any plan loans held by “qualified individuals” which are outstanding at any time from date of enactment through December 31, 2020:

3. the due date for any loan payments that occur between the date of enactment and December 31, 2020 shall be delayed one year, and
   
   
4. interest on the loan will continue to accrue, and payments will be reamortized for the additional interest, with payment recommencing after the delay. (In essence, the loan term is pushed out an additional year.)

For both these loan changes, a “qualified individual” eligible for this relief is the same as defined above for coronavirus-related distributions. It is unclear whether an employer may rely on the employee’s own certification that they satisfy the requirements to be a “qualified individual” for these loan provisions, as, unlike the section addressing coronavirus-related distributions, reliance language is not specifically included in this part of the Act. However, we note that virtually identical loan provisions were provided after Hurricane Katrina, and in that guidance reliance on the employee’s certification of eligibility for the loan relief was permitted; hopefully similar clarification will come for the CARES Act.

Similarly, it is somewhat unclear whether the provision granting payment delay for any outstanding loans is optional or mandatory, as the Act says the due date for any payments during the specified period “shall be delayed for one year.” (The first loan provision, increasing the maximum loan limits for new loans, is generally understood to be optional, as plans have never had to offer the maximum loans, if they offer loans at all.) Again however, guidance issued relating to similar Hurricane Katrina relief made clear that the delayed payment provision was optional, so we will watch for similar guidance here.

Required Minimum Distributions

The CARES Act has waived required minimum distributions (RMDs) for defined contribution plans during 2020. This does not apply to defined benefit plans. It is assumed this waiver will operate similarly to the 2009 waiver, with participants able to elect whether to receive their 2020 RMDs or not. Notably, this relief is available to anyone otherwise required to take RMDs, not just “qualified individuals.”

Plan Amendments

Plans generally must be amended by the last day of the first plan year beginning on or after January 1, 2022, except for government plans which have an additional two years to make amendments. Terminating plans will need to be amended prior to termination. As always, plans will need to be operated consistently with any amendments to be made down the road.

Future Guidance

The CARES Act was introduced, passed, and signed within the space of a little over a week, with provisions intended to be available and utilized immediately during this pandemic. As a result, there remain many unanswered questions, to hopefully be addressed in upcoming guidance. We will be monitoring this legislation as developments continue to unfold.

For more information:
If you have questions or would like more information, please contact one of the following Bowles Rice attorneys: