Administrative Considerations for CARES Act Transactions

The Coronavirus Aid, Relief and Economic Security (CARES) Act created a new emergency retirement plan distribution option dubbed the “coronavirus related distribution,” or “CRD” for short. A CRD can be drawn from an employer sponsored retirement plan such as a 401(k) or from individual retirement accounts (IRAs) in any amount up to $100,000.

The CARES Act sets forth two requirements that need to be met to permit a CRD for a retirement plan participant, said Rick Unser, workplace retirement plan consultant with Lockton Financial Advisors, during a webinar, “Key 401(k) Management Considerations During COVID-19.”

“First, you have to be a qualified individual diagnosed with coronavirus,” Unser said. “Second, you are someone experiencing adverse effects due to the virus, be that lost earnings or a lost job.”

Specifically, to take advantage of the CRD, a participant must certify that either he has contracted the COVID-19 disease or a spouse or dependent has, or that he has lost a job or been furloughed or otherwise suffered a heavy financial burden because of the coronavirus pandemic.

The government is permitting employees to self-certify that they qualify for these distributions, rather than asking employers to obtain proof, Unser said.

The law waives the 10% tax penalty on CRDs, hardship withdrawals and in-service distributions for those younger than 59 1/2, Unser added. Regarding the mandatory 20% withholding on taxable distributions, “People can spread the tax liability over a three-year period,” he said.

Unser also pointed out that participants can repay or recontribute what they have taken out of their retirement plan or an IRA [individual retirement account] within three years, and the total amount they can withdraw, across all types of retirement savings plans they might have, is capped at $100,000.

Plan sponsors should note that this became effective March 27 and is only available for 180 days, he said. 

The CARES Act also doubles the amount of loans that participants can take—from $50,000 to $100,000, or 50% of their account balance to 100%, whichever is less. “From an administrative standpoint, these loan provisions are optional,” Unser said, indicating, however, he believes most employers are going to offer them. “There are a few administrative considerations for allowing these loans. How can participants indicate they want a distribution or a loan? What happens if they are terminated? How do they repay the money?”

The government also is allowing retirement plan account holders age 70 1/2 or older to waive their required minimum distributions (RMDs) for 2020. The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in December changed the age for RMDs from 70 1/2 to 72. However, someone who turned 70 1/2 last year would have still been required to take an RMD this April. The CARES Act changes that.

“Those distributions are based on the balances people held at the end of 2019, but since amounts in retirement accounts have become so much lower [because of the market drop], the government is giving people a pass,” Unser said.

Taking a moment to reflect on market performance, Unser noted that the market declined 19% in the first quarter. “It was the fastest decline into a bear market in history,” he said. While some are saying that once the virus is contained and the economy starts back, the market could return to the levels where it was, he cautioned, “markets can decline for several years before they climb back up.”

For this reason, Unser recommended that plan sponsors examine the business continuity plans of their service providers. “If insurance companies start to struggle, assess your stable value fund,” he said.

He also recommended that any retirement plan sponsor offering target-date funds (TDFs) in its plan reevaluate them and assess how they are performing against the broader markets.