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Chris A. Middleton, CTFA Executive Vice President, Director of Retirement Plan Division

April 2, 2020

CARES Act Retirement Plan Changes

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES) was signed into law. In addition to numerous financial incentives provided to individuals and business, the CARES Act provides some major retirement plan changes allowing plan participants access to their retirement savings as a financial resource in this time of crisis. Employers have the choice to adopt these new provisions within their retirement plans and can effect the changes immediately. We are studying and digesting CARES provisions quickly but below are a few important details.

In-Service Distributions

  • A qualifying participant can now take advantage of the CARES Act in-service distribution option, for Coronavirus Related Distributions (CRDs).
    • Qualifying reasons include: The participant (including spouse or dependent) is diagnosed with the virus; suffers heavy financial burden as a result of being quarantined, furloughed, laid-off or work hours reduced; is unable to work due to lack of child care; business closing or reduced hours; or other factors as determined by the Treasury Secretary
    • Participants are able to self-certify that they meet one of the above qualifications
    • Distributions can be up to $100,000 or 100% of their vested account balance
    • 10% penalty is waived & participant can elect federal withholding upon the distribution
    • Participants can spread the tax liability over three years
    • Participants may repay the distribution within three years to avoid taxation
    • CRDs are available until December 31, 2020

Loan Provisions

  • Although individuals cannot “borrow” from an IRA, loans can be made available to participants within a qualified plan account.
  • Temporary loan rules available through September 24, 2020 include:
    • Statuary limitations have increased from $50,000 to $100,000 for participants with the qualifying reasons listed above
    • Participant can borrow the lesser of $100,000 or 100% of their vested account balance
    • Loan repayments due March 27 through December 31 may be delayed for up to one year for qualifying participants

Additional Provisions

  • Required Minimum Distributions (RMDs) are waived for 2020.
  • The obligation for plan document amendments reflecting CARES Act changes are not required until the December 31, 2022.

As employers consider steps such as suspending matches or even temporarily terminating plans, finding additional ways to help employees is noble. Of course, many people enduring significant financial hardship may benefit from these CARES Act measures. Along the way, thoughtful analysis of employee needs today with the balance of their financial needs in retirement has to be considered. Participants should review other sources of short-term cash before withdrawing or borrowing from their retirement account.

Notably, the super abundant access to participant 401(k) plan accounts should not be celebrated as a long-term win for employees. It is hard to claim victory by encouraging people who may already be saving too little for retirement, to pull as much as $100,000 out of their 401(k) at the bottom of a stock market collapse. Even with waiving many of the penalties associated with early retirement plan withdrawals, some of these provisions could end up hurting the very people we are trying to help. The amount withdrawn today is not the participant’s only loss to their 401(k) savings. The truly startling loss includes the years of investment growth and compound interest in their account that will not be there for their retirement years, which will undoubtly add to our country’s already severe retirement savings shortfall. And that’s not all, successful retirement savings is our country’s single largest non-governmental tool to help augment the long term mathematical hazard that is our Social Security system. People need to be saving for themselves and for the sustainability of the retirement support structure of our great country.

Along with the well-intended provisions in this Act, we need to be mindful as we assist our employees in making sound decisions in regards to any withdrawals. Greenleaf Trust is here to support our clients through this challenging time, so do not hesitate to contact us with additional questions.