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How the CARES Act and COVID-19 Affect Retirement Plans

April 16, 2020

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law. The following is an overview of the key provisions of the CARES Act that affect retirement plan sponsors and their participants along with additional guidance on certain plan compliance issues.

Plan sponsors should assess the impact of the key provisions of the CARES Act and take appropriate steps to implement the desired changes (some of which are required). While formal plan amendments may be adopted retroactively in many instances, plan sponsors will need to take steps quickly to ensure for the proper administration and operation of their retirement plans.

As a plan sponsor, you should consult with your plan’s service providers including your ERISA attorney, recordkeeper, and third-party administrator (TPA) with respect to any changes contemplated in response to the CARES Act and current economic conditions.

Coronavirus-Related Distribution

Under the CARES Act, a plan sponsor may allow certain participants to take penalty-free “coronavirus-related distributions” from an eligible retirement plan. The total amount of any coronavirus-related distributions made to a participant for a taxable year may not exceed $100,000 (must aggregate distributions from all eligible plans) and must be made on or after Jan. 1, 2020 and before Dec. 31, 2020.

In order to qualify for a coronavirus-related distribution, the participant must be a “qualified individual” who meets any of the qualifications below:

  • who has been diagnosed with COVID-19 by a Center for Disease Control and Prevention (CDC) approved test
  • whose spouse or dependent has been diagnosed with COVID-19 by a CDC-approved test
  • who has experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, or having their hours reduced as a result of COVID-19
  • who is unable to work due to lack of child care resulting from COVID-19
  • who owns or operates a business that closed or has experienced a reduction in hours as a result of COVID-19
  • other factors as determined by the Secretary of the Treasury

An eligible retirement plan for this purpose includes 401(k), 403(b), and governmental 457(b) plans, as well as Individual Retirement Accounts (IRAs) including SIMPLE IRAs and SEPs.

The CARES Act did not specifically reference money purchase pension plans or defined benefit and cash balance plans.  As a result, an individual would have to be a qualified individual and have either terminated employment or attained age 59 ½ to be eligible to receive a distribution as it did not provide a waiver of the age 59 ½ requirement for these plans.

The plan administrator may rely on a participant’s self-certification that he or she is a qualified individual (as described above) in order to receive a coronavirus-related distribution.

Coronavirus-related distributions will not be subject to the 10% early distribution penalty tax under Internal Revenue Code (IRC) Section 72(t) that are generally applied to distributions made prior to attaining age 59 ½. Additionally, such distributions are not treated as eligible rollover distributions; therefore, they are not subject to mandatory 20% federal tax withholding under IRC Section 3405. However, these distributions are subject to a 10% federal tax withholding requirement unless waived by the participant (a tax notice must be provided to the participant).

The CARES Act also provides individuals with the option to spread the applicable income tax resulting from the coronavirus-related distribution over a three-year period, if elected.

Finally, the CARES Act allows a participant who obtains a coronavirus-related distribution to repay the distribution to an eligible retirement plan within the three-year period following the distribution to defer taxation.

Note that coronavirus-related distributions are different than hardship withdrawals allowed in connection with a disaster declared by the Federal Emergency Management Agency (FEMA). Plans may permit nonqualified individuals to take a hardship withdrawal due to an immediate and heavy financial need based on expenses and losses (including loss of income) incurred on account of a disaster declared by FEMA if the participant’s principal residence or principal place of employment at the time of the disaster was located in an area designated by FEMA for individual assistance with respect to the disaster (FEMA Safe-Harbor).

Defined Contribution Plan Loans

The CARES Act also liberalizes certain rules regarding participant loans from defined contribution plans (including 401(k), profit-sharing, and 403(b) plans). A participant must be a “qualified individual” as described above for a coronavirus-related distribution.

The CARES Act temporarily increases the maximum thresholds for retirement plan loans under IRC Section 72(p) to the lesser of: (1) $100,000 (increased from $50,000), or (2) the greater of $10,000 or 100% (increased from 50%) of the present value of the participant’s vested account balance. This is only available for plan loans made during the period from March 27, 2020 to Sept. 23, 2020.

The CARES Act also provides relief to qualified individuals with outstanding plan loans (on or after March 27, 2020) by allowing for a suspension of the loan payments (due from March 27, 2020 through Dec. 31, 2020). During the suspension period, interest will continue to accrue. The term of the loan may be extended for a period of up to one year without violating the original term period.

Your plan’s Loan Policy should be reviewed to determine if any of the plan’s existing loan provisions need to be updated (for example, the number of loans that a participant can obtain).

Waiver of Required Minimum Distributions for 2020

The CARES Act waives the requirement for Required Minimum Distribution (RMD) under IRC Section 401(a)(9) for the 2020 tax year (and includes RMDs due to participants and IRA owners whose required beginning date was April 1, 2020).

This waiver applies to defined contribution plans (including 401(k), 403(b) plans, and governmental 457(b) plans) and to traditional IRAs. The waiver does not apply to RMDs from defined benefit plans.

Individuals must take their first RMD by April 1 of the year following the year in which they turn age 72 (or age 70 ½ for those who turned 70 ½ before Jan. 1, 2020). The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) increased the age at which RMDs must begin from age 70 ½ to 72. Participants (other than individuals who own 5% or more of a company) in employer-sponsored plans who are still working past the age of 72 may delay their distributions until they stop working.

If a participant or IRA owner has already taken an RMD for 2020, they are permitted to roll that amount to an IRA or other qualified plan to defer taxation. Currently, the rollover must be completed within the 60-day period following the distribution.

Furthermore, the RMD waiver also applies to beneficiaries and will not count against the statutory five-year required distribution period for inherited IRAs and the required 10-year period for defined contribution plans under the SECURE Act.

Defined Benefit Plans Relief for 2020

Under the CARES Act, the due date for a plan sponsor’s required minimum contributions to a single-employer defined benefit (DB) plan has been extended to Jan. 1, 2021.

A plan sponsor that takes advantage of this extension must include interest at the plan’s interest rate calculated from the date the minimum required contribution was due to Jan. 1, 2021.

For purposes of meeting the benefit restriction rules of IRC Section 436 and Section 206 of the Employee Retirement Income Security Act of 1974 (ERISA), the CARES Act also permits plan sponsors to elect to treat the plan’s adjusted funding target attainment percentage (AFTAP) for the last plan year ending before Jan. 1, 2020 as the AFTAP for the plan years that include the 2020 calendar year. For calendar-year plans, plan sponsors can use the AFTAP as of Dec. 31, 2019.

As a result, plans should have higher AFTAPs and be less likely to have to implement certain benefit restrictions (e.g., cease benefit accruals). However, that also means that if the plan was subject to benefit restrictions in 2019, those benefit restrictions will continue so long as the 2019 AFTAP is used.

Given the current stock market volatility, future plan years’ minimum funding requirements may be significantly impacted based on the valuation date of the plan. If the market value of the assets is significantly reduced, contributions to the plan may be significantly increased. In an effort to contain costs, employers may consider freezing benefits during the current plan year, but must do so before participants earn those benefits.

Defined benefit plan sponsors should consult with their legal counsel and the plan’s actuary to discuss their current and projected minimum contribution funding requirements, to review the plan’s actuarial assumptions and estimates, and to review future projected benefit accruals.

Defined Contribution Plan Contributions

As employers face the unprecedented effects of the coronavirus (COVID-19) pandemic on their workforce and business operations, they may consider the need to reduce or temporarily suspend their contributions to their defined contribution plans (including 401(k), safe-harbor, profit-sharing, and 403(b) plans).

Employer Contributions

If the plan document provides for discretionary nonelective (profit-sharing) and/or matching contributions, a plan amendment is generally not required. The employer can make the decision to forego discretionary contributions at any time up until the due date plus extension of their business income return for the 2020 tax year. The employer should approve (via resolution or in the plan’s committee meeting minutes) any decisions made with regard to discretionary contributions.

If the plan document provides for a fixed or mandatory nonelective (profit-sharing) and/or matching contributions, a plan amendment is required to either reduce, suspend, or eliminate future fixed contributions. The plan can be amended at any time to reduce, suspend, or eliminate these fixed or mandatory contributions on a prospective basis. Thus, the employer is obligated to fund any fixed or mandatory contributions that participant earned prior to the amendment effective date. The employer must also provide employees with a notification of the plan amendment in the form of a Summary of Material Modifications (SMM) or an updated Summary Plan Description (SPD). The employer should approve (via resolution or in the plan’s committee meeting minutes) any decisions made with regard to fixed contributions.

If the plan document provides for “safe-harbor” (nonelective or matching) contributions, the employer can only suspend or reduce these contributions mid-year if the employer is operating at an economic loss for the plan year, or has previously provided participants with a notice stating that safe-harbor contributions may be reduced or suspended mid-year, and if the following procedural requirements are met:

  • The employer must provide a notice to employees at least 30 days before the change is made, explaining that the safe-harbor contributions are being reduced or suspended. Participants must have a reasonable opportunity after receipt of the notice to modify their 401(k) contribution elections.
  • The employer must amend the plan document to provide for the reduction or suspension of these contributions prior to the effective date of the change. The employer is still obligated to fund any safe-harbor contributions earned under the terms of the plan prior to the effective date.
  • Because the plan loses its safe-harbor status, the employer will be required to perform ADP, ACP, and top-heavy testing for the entire plan year.

For plan years beginning after Dec. 31, 2019, the SECURE Act eliminated the notice requirement for an employer that makes safe-harbor nonelective contributions. However, the procedural requirements listed above generally still apply.

The CARES Act did not provide any specific guidance relating to the suspension or reduction of safe-harbor contributions due to COVID-19. However, we expect that the Internal Revenue Service (IRS) and/or Department of Labor (DOL) will provide additional guidance specific to safe-harbor contributions as several 401(k) industry groups have reached out to members of Congress advocating for relief.

Deadline Extended for Certain Employer Contributions and IRA Contribution for 2019

Per IRS Notice 2020-18, any person (including an individual, a trust, estate, partnership, association, company, or corporation, as provided in IRC Section 7701(a)(1)) with a federal income tax return due date of April 15, 2020 was granted relief by the Secretary of the Treasury by postponing the due date for these returns to July 15, 2020.

As such, affected employers and individuals have until July 15, 2020, plus extensions, to make contributions to an employer-sponsored retirement plan or to an IRA.

Deposits of Participant 401(k) Deferral Contributions and Loan Repayments

Although workforce changes and personal circumstances may result in reduced participant 401(k) deferral contributions and loan repayments, it is important to note that the current COVID-19 pandemic does not reduce the plan sponsor’s fiduciary obligations with regard to depositing participant contributions and loan repayments.

The Department of Labor (DOL) Regulation 2510.3-102 requires that participant contributions and loan repayments be remitted to the plan on the earliest date on which they can be reasonably segregated from an employer’s general assets, but in no event later than the 15th business day following the end of the month in which amounts are contributed by participants or are withheld from their wages. In addition, the DOL has stated that the 15th business day following the end of the month period for remittance is not a safe harbor.

The DOL’s interpretation of the earliest date that participant contributions and loan repayments can be reasonably segregated is based on the plan management’s previous pattern of remittance. The earliest date that plan management has remitted previous contributions becomes the standard unless an unusual circumstance occurs. In most cases, the DOL will expect plan management to remit participant contributions in the same timely manner as payroll tax withholdings are remitted.

The DOL provides a safe-harbor 401(k) deposit rule for small retirement plans (fewer than 100 participants) in which deposits will be considered timely if made within seven business days of the date they were withheld.

Failure to remit participant contributions and loan repayments to the plan in a timely and consistent manner could result in a prohibited transaction which requires correction and possible lost earnings allocations to affected plan participants and may give rise to additional reporting and disclosure.

Partial Plan Termination

As employers continue to manage potential reductions in their workforce due to the unprecedented business and economic impact of COVID-19, we note that these workforce reductions could trigger a “partial plan termination.”

A partial plan termination is triggered by a distinct event or series of events (e.g., reductions in workforce, sales of subsidiaries, closing of a division, etc.) over a certain time period. The determination of a partial plan termination is based on the facts and circumstances of the situation and related subsequent events.

For a defined contribution plan, this is only relevant if the employer makes matching or profit-sharing contributions that are subject to a vesting schedule.

Generally, if the employer-initiated severances from employment reduces the number of plan participants by 20% or more during the applicable time period, the IRS takes the position that a partial plan termination is presumed to have occurred (a reduction under 20% could also qualify, depending on the facts and circumstances).

When a partial plan termination occurs, the plan must fully vest the accounts of affected participants.

Because partial plan terminations are generally determined at or after the end of a year, plan sponsors should continue to apply the current vesting schedule for mid-year distributions and be aware of the possibility of a partial plan termination determination at year-end as the economic implications of the coronavirus pandemic continue to unfold.

If the affected participants were not fully vested upon termination and previously received a distribution, then they should receive a residual distribution of the unvested portion of their account.

For a defined benefit plan, the determination of a possible partial plan termination and the resulting calculation of participant benefits is much more complicated. As such, the plan sponsor should consult with the plan’s actuary and ERISA attorney. If a defined benefit plan incurs a partial plan termination, then it may give rise to a notice requirement to the Pension Benefit Guaranty Corporation (PBGC) that a reportable event has occurred and could also lead to an additional funding liability.

The determination of whether a partial plan termination has occurred or not is a complex issue. The plan sponsor should consult with its ERISA attorney, recordkeeper, and third-party administrator to discuss the specific facts and circumstances as it relates to the plan sponsor’s situation.

Plan Amendment Deadlines

Plan sponsors can implement many of the CARES Act provisions immediately without a formal plan amendment. The deadline to amend plan documents for both mandatory and optional changes under the CARES Act is the last day of the first plan year beginning on or after Jan. 1, 2022 (Dec. 31, 2022 for a calendar-year plan). Governmental plans have an additional two years to amend the plan document.


As a plan sponsor, you should discuss all contemplated changes with your plan’s service providers including your ERISA attorney, recordkeeper, and third-party administrator (TPA).

A careful review of your retirement plan’s provisions, policies, and procedures should be conducted to determine if any additional changes, including those that might affect the plan’s administration and recordkeeping, might be required to fully implement any changes due to the CARES Act or due to the current economic conditions.

In addition, communications should be prepared and distributed to the plan’s participants to inform them of any changes in the plan’s provisions and/or features.

While the CARES Act provides the framework to provide additional resources to retirement plan participants during these difficult times, further guidance will be needed from the IRS, DOL, and Treasury Department, as well as other agencies, to address outstanding questions relating to various administrative and operational aspects of certain provisions of the CARES Act.

KSM will continue to closely monitor any additional published guidance and provide updates on the impact of the CARES Act on retirement plans. If you have questions related to your specific circumstances, please contact a member of KSM’s Employee Benefit Plan Services Group or complete this form.

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