The Cares Act and Its Effect on Retirement Plans

The Coronavirus, Aid, Relief, and Economic Security (CARES) Act includes several provisions pertaining to qualified retirement plans and individual retirement accounts (IRAs).   These provisions ease retirement plan hardship and loan rules to free up funds for individuals impacted by the pandemic and to provide relief from the required minimum distribution (RMD) rules. The final bill also adds funding relief for single-employer defined benefit plans.

Below are the key provisions affecting qualified retirement plans and IRAs:

Hardship Distributions Made Between January 1, 2020 and December 31, 2020

Currently, plan participants under the age of 59½ who receive hardship distributions are subject to a 10% tax on this early withdrawal.  The CARES Act waives this 10% tax on early withdrawals up to $100,000 from a qualified retirement plan (and IRA) for anyone who:

  • is diagnosed with COVID-19;
  • whose spouse or dependent is diagnosed with COVID-19; 
  • who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or
  • other factors as determined by the Treasury Secretary.

The CARES Act further permits those plan participants to pay the associated taxes on the income from the distribution ratably over a three-year period; and also allows them to repay that amount, tax-free, back into the plan over the next three years. These repayments, if made, are essentially treated as rollover contributions and would not be subject to the retirement plan contribution limits.

Employee certification of the need for the Hardship Distribution is all that is required.  In other words, plan administrators are not required to request or review evidence or documentation to determine qualification for the distribution.

Plan Loans 

Currently, retirement plan loans are limited to the lesser of $50,000 or 50% of the participant’s vested account balance.  The CARES Act doubles the current retirement plan loan limits, for a period of 180 days following the date of enactment of the CARES Act, to the lesser of $100,000 or 100% of the participant’s vested account balance in the plan.

Additionally, participants with outstanding plan loans with a repayment amount due during the period beginning on the date of enactment of the CARES Act through December 31, 2020 can delay their loan repayment(s) for up to one year.  Consequently, the 5-year maximum limitation that normally applies to participant loans may also be extended for a period of up to one year.

NOTE: Even if the plan does not currently allow for hardship distributions or loans, retirement plans can adopt these rules immediately, provided the plan is amended on or before the last day of the first plan year beginning on or after January 1, 2022, or later, if prescribed by the Treasury Secretary.

Temporary Waiver of Required Minimum Distribution Rules

The Act waives Required Minimum Distributions (RMD) for the calendar year 2020 for defined contribution plans, including 401(k), 403(b), 457(b), and IRAs.  Currently, with the passage of the SECURE Act, individuals generally must take an RMD upon attaining age 72 from their retirement plans and/or IRAs.

This waiver also applies to those individuals who turned 70 ½ (the age required to start taking RMDs prior to the effective date of the SECURE Act) by December 31, 2019 and elected to postpone their first RMD until April 1, 2020. 

Single-employer Defined Benefit Plan Funding Rules

The Act allows sponsors of single-employer defined benefit plans more time to meet their funding obligations by delaying the due date for any contribution otherwise due during 2020 until January 1, 2021. However, any contributions that were due earlier (such as those plans required to make quarterly funding contributions) would be due with interest.

The Act also provides that a plan’s funding status for benefit restrictions, as of December 31, 2019, will apply throughout 2020 to enable a plan sponsor to elect to treat the plan’s adjusted funding target attainment percentage for the last plan year ending before January 1, 2020 as the adjusted funding target attainment percentage for plan years which include calendar year 2020.

Expansion of Department of Labor Authority to Postpone Certain Retirement Plan Deadlines

The Act provides the Department of Labor with expanded authority to postpone certain deadlines under ERISA by including a public health emergency declared by the Secretary of Health and Human Services under the Public Health Service Act as a condition to allow such deadline extensions.

The American Retirement Association (ARA) has been pushing for relief from various retirement plan requirements, such as an automatic extension of the Form 5500 series, an extension to the deadline for correcting failed non-discrimination tests and an extension of the period for distributing excess contributions and excess aggregate contributions under a plan.

Please visit our Coronavirus resource page at for related content.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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