COVID-19 Legislation Includes Retirement Plan Distribution, Loan, and Required Minimum Distribution Relief

Congress has passed, and the President has signed, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to provide emergency economic relief in response to the COVID-19 pandemic. That relief includes greater access to retirement plan distributions and loans, and a one-year waiver of the Code’s required minimum distribution rules. Here are highlights for 401(k) plans:

• Distributions and Loans. The CARES Act expands access to retirement plan distributions and loans for qualified individuals who are diagnosed with coronavirus, whose spouse or dependent is diagnosed with coronavirus, or who experience adverse financial consequences due to certain virus-related events including quarantine, furlough, or layoff, having hours reduced, or losing child care.

  • Coronavirus-Related Distributions. Distributions taken by a qualified individual from an eligible retirement plan (including a 401(k) plan) on or after January 1, 2020, and before December 31, 2020, are considered “coronavirus-related distributions” to the extent they do not exceed $100,000 in the aggregate. These distributions are not subject to the 10% penalty tax under Code § 72(t), are treated as satisfying certain distribution restrictions (including the restrictions applicable to elective deferrals under a 401(k) plan), and are exempt from some other distribution-related rules, including 20% withholding and the Code § 402(f) notice requirement.
  • Taxation. Coronavirus-related distributions, to the extent taxable, are treated as income received ratably over a three-year period unless the recipient elects otherwise.
  • Repayment. During the three-year period after a coronavirus-related distribution, the recipient can contribute up to the full amount of the distribution to an eligible retirement plan as if the contribution were a timely rollover of an eligible rollover distribution.
  • Increased Limit for New Plan Loans. Qualified individuals may take plan loans up to the lesser of $100,000 (instead of the usual $50,000) or 100% (instead of the usual 50%) of their vested account balance. Eligible loans must be taken during the 180-day period beginning on the date of the law’s enactment (i.e., no later than September 22, 2020).
  • Delayed Repayment for Existing Loans. Qualified individuals with an existing loan may delay for one year any loan payments coming due during the period from the Act’s enactment through December 31, 2020. [EBIA Comment: The Act says the due date for loan repayments during that period “shall” be delayed, so that aspect of the law does not appear to be optional.]
  • Plan Amendments. Plans generally may be amended retroactively for the distribution and loan provisions as late as the last day of the first plan year beginning on or after January 1, 2022, so long as the plans are operated as if the amendments were in effect from their effective date. Government plans have two additional years to amend.
• Required Minimum Distributions. The CARES Act includes a temporary waiver of the Code § 401(a)(9) required minimum distribution rules for specified defined contribution plans (including 401(k) plans) for calendar year 2020. The waiver applies to distributions for 2020 and to distributions for 2019 that were due by a required beginning date in 2020 (and not paid in 2019). The waiver will not alter a participant’s required beginning date for purposes of applying the minimum distribution rules in future years.

EBIA Comment: The CARES Act’s distribution and loan provisions strongly resemble the disaster relief enacted for hurricane victims in 2017 (see our Checkpoint article), and later extended to wildfire victims in 2018 (see our Checkpoint article). Unlike that prior legislation, however, the CARES Act’s provisions are not geographically limited, do not include provisions regarding home purchases, and do not require proof of economic loss. And the CARES Act further eases the burden of administration by allowing employees to self-certify that they are qualified individuals. The required minimum distribution relief also resembles past relief: the 2009 required minimum distribution waiver in the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) (see our Checkpoint article). But again, the CARES Act goes further by offering relief for distributions attributable to 2019 that would have been made by a required beginning date in 2020. Employers and advisors working with welfare and fringe benefits will be interested in other CARES Act changes, which are covered in our separate Checkpoint article. For more information, see EBIA’s 401(k) Plans manual at Sections XII (“Distributions: Code Requirements and Design Choices”), XIV.K (“10% Additional Tax on Early Distributions”), XV.H (“Special Hardship Rules for Disaster Relief”), and XVI.N (“Distributions: Participant Loans: Special Rules for Disaster Relief”).

Contributing Editors: EBIA Staff.