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CARES Act Retirement Relief Appears Optional

Posted on Apr. 1, 2020

Some of the provisions in the latest federal coronavirus legislation intended to help retirement plan participants may not be mandatory, according to a practitioner.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) “provides employers with a few different options for loosening the retirement plan distribution and loan rules,” Seth J. Hanft of Baker & Hostetler LLP said March 31 during a webinar hosted by his firm. “I think it’s important to note that I said ‘options,’ because it appears that employers are free to decide whether to add these features to their plans or not.”

Hanft added that employers may also have the flexibility to tailor those options as long as they don’t exceed the CARES Act requirements.

The new law allows distributions of up to $100,000 to coronavirus-affected individuals without imposing the normal early withdrawal penalty under section 72(t). The distributions are available only in 2020, and the amount distributed can be recontributed within three years. Hanft said any amounts repaid are treated as eligible rollover distributions so that they won’t be taxable to the individual.

Individuals eligible for the distributions include those diagnosed with COVID-19, those whose spouse or dependents are diagnosed with COVID-19, and those who have suffered adverse economic effects because of the coronavirus.

Hanft said it's important to note that plan administrators can rely on an employee’s certification that they meet these conditions. “That’s a little bit different than hardship withdrawals, where a plan administrator might need to verify that a hardship exists in order to trigger one of those distributions,” he said.

Individuals who are eligible for distributions are also eligible for loan relief, including an increased loan limit of up to $100,000.

RMD Relief Appears Mandatory

The CARES Act also waives required minimum distributions (RMDs) for 2020.

“Unlike with the special distribution and loan rules, this RMD change does appear to be mandatory,” Hanft said.

Hanft said the RMD relief generally applies to defined contribution plans like section 401(k) plans, section 403(b) plans, and government-sponsored section 457(b) plans, but not nonprofit-sponsored section 457(b) plans. It also applies to individual retirement accounts, he said.

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