The bill provides a delay for minimum annual required contributions and relief for plans that may have benefit restrictions triggered due to a drop in funding levels.
The CARES (Coronavirus Aid, Relief and Economic Security) Act signed into law March 27 not only includes provisions related to defined contribution (DC) plans, but it also provides relief for defined benefit (DB) plan sponsors.
Blogs and client alerts from multiple law firms report that Section 3608 of the CARES Act provides a delay for minimum annual required contributions (ARCs) that would otherwise be due from single-employer DB plans during this calendar year.
The new due date for any such contribution is now January 1, 2021. Any contributions that are delayed are increased by interest for the period beginning on the original due date to the actual payment date.
The CARES Act also provides relief for required benefit restrictions. For plan years beginning on and after January 1, 2008, the Pension Protection Act of 2006 (PPA) imposed new benefit restrictions on plans that do not meet specific funding percentage levels. If a plan’s adjusted funding target attainment percentage (AFTAP) is less than 80%, there are restrictions on distributions that may be made to participants and on the ability to enhance benefit accruals.
Under the CARES Act, a plan sponsor may elect to treat the plan’s AFTAP for the previous plan year —the year ending before January 1, 2020—as the AFTAP for plan years which include calendar year 2020. This may allow some plans to avoid triggering certain benefit restrictions in 2020 that would otherwise apply.
“Our firm sponsors both a 403(b) and 457(b) plan and have already begun to receive questions from employees regarding the hardship distribution (403(b)) and unforeseeable emergency distribution (457(b)) provisions in our retirement plans and whether they would be able to access their funds in such plans due to expenses related to the COVID-19 pandemic. Will such distributions be permissible?”
Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:
COVID-19-related distributions will indeed be permitted for 403(b) and governmental 457(b) plans under the CARES Act legislation signed by President Donald Trump on March 27. The legislation allows retirement plans to permit distributions of up to $100,000 per individual per year (note, this is a total limit per individual, and NOT a per-plan limit) who can certify that they meet one of the following conditions:
Diagnosed with COVID-19
Spouse or dependent diagnosed with COVID-19
Experience adverse financial consequences as a result of being quarantined, furloughed, laid-off, reduced work hours, inability to work due to lack of child care because of COVID-19, the closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors, as determined by the Treasury Secretary (which, as the Experts understand, will be quite flexible).
Though subject to ordinary income taxes, the CARES Act waives the 10% early withdrawal penalty tax for such distributions. Tax on the income from the distribution can also be paid over a three-year period. Though we don’t yet know the exact mechanism for this, individuals may also have the ability to repay the amount into the plan over the next three years. If permitted, these repayments would not be subject to retirement plan contribution limits.
It should be noted that even though the distribution can be paid back to the plan, it is not an eligible rollover distribution; thus, it is not subject to the 20% withholding for payment of taxes. Thus, a participant can receive the entire amount of the distribution or elect to withhold taxes, subject to recordkeeper restrictions.
Finally, COVID-19 distributions are not considered hardship distributions. Instead, it is in its own new category of distribution for retirement plan purposes, so none of a plan’s hardship restrictions apply. Therefore, a plan can allow for this type of distribution even if it does not permit hardship distributions.
Non-governmental tax-exempt 457(b) plans are NOT eligible for the COVID-19 distributions described above. However, the “unforeseeable emergency” provision present in many tax-exempt 457(b) plans, may indeed include distributions due to COVID-19-related illness, if provided in the plan. From the IRS website:
“457(b) plans may offer distributions to a participant based on an unforeseeable emergency for:
* an illness or accident of the participant, the participant’s beneficiary, or the participant’s or beneficiary’s spouse or dependents;”
However, keep in mind that, in order for a 457(b) plan participant to receive a distribution for emergency expenses due to coronavirus, he/she must show that the emergency expenses could not otherwise be covered by insurance, liquidation of the participant’s assets or cessation of deferrals under the plan. Though such a distribution would be subject to ordinary income taxes, there would be no additional penalty tax payable, since the 10% premature distribution penalty does not apply to 457(b) plans.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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