Help clients optimize their retirement plan
The Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced several new provisions that increase individuals’ access to their retirement plan funds with relaxed tax consequences. For companies that are plan sponsors of 401(k) and 403(b) plans, these new provisions will require additional guidance in determining what changes can be made to current plans to best aid their employees that qualify for this special relief.
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Coronavirus Related Distributions (CRDs)
The CARES Act permits individuals affected by COVID-19 to make CRDs of up to $100,000 with minimal penalty. For distributions made between Jan. 1, 2020, and Dec. 31, 2020, the CARES Act waives the 20% federal tax withholding requirements as well as the 10% early withdrawal penalty. Additionally, participants can repay these distributions over three years, with the taxes owed being spread over three years as well.
Plan Loan Limits
The CARES Act also raised the limits for qualified plan loans for affected individuals until Sept. 23, 2020, increasing the limit from the lesser of $50,000 or 50% of the participant’s vested account balance to the lesser of $100,000 or 100% of the participant’s vested account balance. Additionally, the legislation permits individuals affected by the COVID-19 crisis to delay any loan repayments that were due in 2020 for up to one year, but interest does accrue.
Required Minimum Distributions (RMDs)
Under the CARES Act, all RMDs are waived for 2020 participants and beneficiaries. The legislation also allows any participants who started taking RMDs for 2020 to pay them back to the plan and reduce taxable income.
Defined Benefit Plans
The CARES Act provides additional relief allowing Defined Benefit Plan sponsors to delay payment of any contribution due in 2020 to Jan. 1, 2021. Though interest will continue to accrue, it provides relief to any plan sponsors experiencing adverse financial impact due to the pandemic.
Aprio’s Retirement Plan Services experts can work with clients to determine the amendments that will need to be made to their current plans to maximize the relief created by the CARES Act to both employees and plan sponsors. For instance:
Defined Benefit Plan sponsors may need to modify plan documents regarding the 2020 contribution requirements. For instance, plan sponsors may freeze plan benefits to help with required contributions due to loss in the value of plan assets. Certain changes can be rescinded near the end of 2020 if the financial impact of the pandemic is less severe than anticipated.
Current plans may contradict the new flexibility associated with making and repaying CRDs, thus preventing employees’ ability to maximize their aid.
Plan sponsors may need to modify their plan’s loan limits or repayment period in order for participants to take the maximum loans permitted through the CARES Act. There may be additional plan administrative processes to accommodate the loan repayment suspension allowed through the CARES Act.
Having the conversation with the client:
“If you sponsor a 401(k) or 403(b) retirement plan, there may be necessary plan amendments you need to make to ensure your employees can access the relief created by the CARES Act and receive the personal funds they need during this crisis. Alternatively, if you are a Defined Benefit Plan sponsor, there may be actions you can take now to delay contribution payments or freeze plan benefits to mitigate any adverse financial impacts from the current crisis.”