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CARES Act Implications for Employee Benefit Plans

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The CARES Act was signed into law on March 27, 2020, with many components receiving national headlines as it provides unprecedented benefits to small business owners and employees. The CARES Act includes several provisions impacting employee defined contribution retirement plans such as 401(k) retirement savings plans that employers should be aware of, as follows:

  • Participant Loans: Eligible participants are allowed to take out loans in amounts up to the lesser of $100,000 or 100% of the participant’s vested account balance beginning March 27, 2020 through September 23, 2020. Previously, this was limited to $50,000 or 50% of the participant’s vested account balance.
  • Additionally, for participants with existing outstanding plan loans, repayments between March 27, 2020 and December 31, 2020 may be delayed for one year. The interest on the loan will continue to accrue on the outstanding principal balance.
  • Required Minimum Distributions (RMD): Required minimum distributions for 2020 are waived for IRAs and defined contribution plans.
  • Hardship Distributions: Eligible participants are allowed to take a hardship distribution up to $100,000 without incurring the 10% early withdrawal penalty. Participants are able to take these distributions through December 31, 2020. Additionally, the distribution can be included in the participant’s taxable income ratably over three years or be repaid within three years without having to include the proceeds in taxable income for Federal reporting purposes.

The CARES Act provisions define an eligible participant for hardship distributions and participant loans as anyone meeting any of the following three criteria:

  • A participant who was diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention.
  • A participant whose spouse or dependent was diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention.
  • A participant who experiences financial hardship from quarantine including being laid off, furloughed, a reduction of working hours or lack of child care due to COVID-19.

The CARES Act provides the Department of Labor (DOL) the authority to delay certain reporting requirements of the Employee Retirement Income Security Act of 1974 in the event of a public health emergency as declared by Secretary of Health and Human Services. This would include annual Form 5500 filings. As of the date of this publication, the DOL has not provided any guidance regarding a delay in any reporting requirements.

If you want to take advantage of this program, please talk with your retirement plan’s third party administrator, as your plan may need to be amended to allow for these provisions.