CARES Act: What 401(k) Plan Sponsors Need to Know
This week the Senate unanimously passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a massive stimulus bill targeting the economic turmoil caused by the coronavirus pandemic. The 883-page bill aims to help Americans through these financially trying times. While as of this writing the CARES Act had yet to pass the House, all indicators point to the bill passing and being signed by the president.
Specific to 401(k) plans, the CARES Act includes provisions around hardship distributions, 401(k) loans, and RMDs (Required Minimum Distributions) for 2020. Additionally, the Families First Coronavirus Response Act (FFCRA) was also passed and expands paid-leave coverage to employees affected by coronavirus. We are working closely with our ERISA consultation team and industry partners to determine the specifics of how plan sponsors should adapt administrative practices to accommodate these special 2020 provisions.
Hardship Withdrawals
The 10% early withdrawal penalty has been waived for distributions up to $100,000. Eligible participants under the age of 59 ½ may be able to request a distribution due to financial distress related to coronavirus through the end of 2020.
It is left to the plan sponsor’s discretion to determine that the request is for a qualifying coronavirus-related reason (such as adverse financial consequences due to being quarantined, furloughed, having work hours reduced, or not being able to work due to childcare coverage).
The taxes due on the withdrawal amount may be paid out over a three-year period.
Participants have the option to repay the distribution amount back into their 401(k) accounts within three years.
401(k) Loans
Participants with a new or existing 401(k) loan can delay any repayments due in 2020 for one year.
This covers loans due in full in 2020 – the CARES Act allows the repayment to be delayed for one year from the original due date. (Participants who terminate employment in 2020 will thus have additional time to repay their loan prior to it being considered a deemed distribution.)
The maximum loan amount has been increased to the lesser of $100,000 or the maximum account balance available.
The same risks regarding 401(k) loans still exist.
Required Minimum Distributions
Retired participants and owners 70 ½ and older may waive 2020 required distributions from their 401(k) and other retirement savings accounts such as an IRA.
Individuals may find this beneficial as the 2020 RMD is calculated on account balances as of December 31, 2019 but due to recent market declines, a retiree could be withdrawing from an already reduced account balance.
Participants should speak with their financial advisor or tax consultant in determining whether to waive their 2020 RMD.
FFCRA
The DOL issued guidelines this week on the new Families First Coronavirus Response Act (FFCRA) which expands paid leave for specific reasons related to COVID-19.
Some employers may be exempt, such as those with fewer than fifty employees, but in general, employees must be provided with up to ten weeks of paid leave for specific coronavirus-related reasons.
Additional guidelines for employers can be found here.
Your Human Investing 401(k) Team is here to be a resource for you and your employees. We will be sure to share additional updates and guidance as they are provided. Please don’t hesitate to reach out to us with any questions in the meantime!
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