CARES Act requires pension plan sponsors to make decisions immediately
A third round of relief from the Coronavirus pandemic made its way through the Senate and the House of Representatives and was signed off by President Trump.
The law on aid, relief and economic security against the coronavirus (CARES Law) provides more than $ 2 trillion in assistance to businesses and individuals. It also provides new opportunities for participants in defined contribution pension plans to withdraw funds from their accounts in order to pay for expenses related to COVID-19, if their employer chooses to open up those possibilities.
Some of the largest archivists of the 401 (k) and 403 (b) regimes require employers to make this choice with only a few days’ notice.
New broadcast option
The CARES Act creates a new form of continuous distribution for participants who are affected by COVID-19. Such a “coronavirus-related distribution” – or CRD – is not subject to the 10% early distribution penalty under Article 72
Significantly, this is an optional benefit that may be – but is not mandatory – made available by plan sponsors.
If a plan sponsor chooses to make this new form of distribution available, CRDs can be paid to eligible individuals only for the period January 1, 2020 to December 31, 2020. An eligible individual includes a participant:
- Who is diagnosed with COVID-19;
- whose spouse or dependent is diagnosed with COVID-19; or
- Who suffers negative financial consequences
- following a quarantine, layoff or discharge;
- or having reduced working hours due to COVID-19,
- being unable to work due to an absence of childcare caused by COVID-19,
- closing a business due to COVID-19,
- or other factors identified by the Secretary of the Treasury.
The plan administrator can rely on a member’s certificate attesting that he meets one of these criteria.
Immediate decisions required by archivists
Some of the country’s leading archivists are forcing employers to decide within days of whether or not to offer this new form of distribution. Even before the CARES Act came out of the House, Fidelity Investments informed some of its plan sponsor clients via email that they must opt out of the new form of distribution by March 31, 2020, if they do not. do not wish to make it available. . Some plan sponsors first received this notice from Fidelity on March 26, effectively giving them two business days to make a decision.
As the ink on this new legislation is not yet dry, there are a number of unanswered questions about coronavirus-related distributions.
For example, it is not clear whether a standard-service distribution that was taken earlier in 2020, and that was subject to the 10% advance distribution tax, can now be ‘requalified’ as a coronavirus-related distribution. . The process by which CRDs can be repaid to the distribution plan (or another plan or IRA) is also unclear. And while immediate access to cash may ease the financial burden many participants currently face, it is also worth considering how these distributions might affect retirement readiness in the years to come, especially given the extremely volatile markets.
Spencer Fane recommends that plan sponsors who are forced to decide whether or not to offer CRDs in the coming days first consult their investment advisers and / or legal counsel.
Other pension reforms
The CARES Act also provides for plan loan relief for people affected by the pandemic.
Eligible individuals (as described above) are entitled to a temporary increase in the amount available in the form of a loan (up to $ 100,000) for loans taken out within 180 days of the coming into force of the Act. Any plan loan payment owed by an eligible person during the period beginning with the passage of the CARES Act and continuing until December 31, 2020, will be delayed for an additional year.
Subsequent loan payments should be adjusted to reflect the delay and any interest that accumulates during the delay.
In addition, the CARES Act provides an exemption from any required minimum distribution that would otherwise have been due in 2020. This relief applies to qualified defined contribution pension plans (such as 401 (k) plans), sections 403 ( a) and 403 of the Code. (b) government plans and plans under section 457 (b) of the Code.
Plan changes will be required to reflect this relief, as will the member notices. Plans will generally have until the end of the plan year beginning on or after January 1, 2022 to adopt such changes, although notices to members should be circulated earlier. Government plans will have two more years to pass amendments.
The CARES Act also provides relief to defined benefit plan sponsors and extends relief to health plan sponsors. This is just one of many legislative and regulatory initiatives heralded in a dizzying burst over the past few weeks, and the landscape is likely to continue to change.
Greg Ash is partner of Spencer Fane LLP at the company’s offices in Overland Park, Kansas. He is chair of the firm’s benefits practice group and helps clients maximize the value and minimize the risks inherent in their benefit plans.