In response to the COVID-19 pandemic and resulting economic disruption, on Friday Congress passed and the President signed the massive $2.2 trillion stimulus bill known as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The total cost of the stimulus is about 9% of our GDP. Now that the CARES Act is official, we wanted to provide more information regarding CARES Act relief for eligible retirement plans (including 401(k), 403(b), governmental 457(b) and Individual Retirement Arrangements (IRAs)), including expanded and penalty-free withdrawal rights, expanded loan rights, extended rights to pay back loans and withdrawals, and waiver of mandatory distributions.
Expanded and Penalty-Free Withdrawal Rights
The CARES Act offers expanded and penalty-free withdrawals. Plans may (but are not required) to permit these.
Expanded Participant Loan Rights
The CARES Act expands participant loan options as well. Generally, employer-sponsored retirement plans may offer participant loans under the plan. If a plan permitted participant loans, prior to the CARES Act those participant loans were subject to a limit of $50,000 or 50% of the participant’s vested benefit (subject to lookback and other rules). Now, under the CARES Act, the participant loan limit under employer-sponsored retirement plans has increased to $100,000 or 100% of the participant’s vested benefit for loans to a “qualified individual” (which is the same as the definition above for coronavirus-related distributions). Those expanded limits apply for a loan made in the 180 days from March 27 to September 23, 2020. Plans are not required to allow participant loans or allow for participant loans under the higher limits authorized under the CARES Act.
In addition to the availability of higher participant loan amounts, the CARES Act allows a delay in the repayments by a "qualified individual" for up to one year for participant loans from the date of enactment through December 31, 2020. That delay may extend the general 5-year participant loan repayment period. If a plan allows a repayment delay, later repayments should be adjusted for interest accrued during the delay and to for the extended repayment period.
Plans may (but are not required to) offer the relief described above and need not amend the retirement plan in advance. To the extent a plan wants to allow participants to take advantage of this relief, please be aware that plan amendments for the coronavirus-related distribution and loan limits described above need not be made until at least the last day of the first plan year beginning on or after January 1, 2022. Governmental plans have two years after that date.
Please do not hesitate to contact us with any questions about the CARES Act provisions impacting retirement plans.