Provisions Directly Impacting Employer Benefit Plans
Retirement Plan Provisions The early withdrawal penalty for certain distributions from retirement plans has been waived. The new provision allows individuals to withdraw up to $100,000 from a qualified retirement account without incurring the 10% penalty for early withdrawals. Criteria for eligibility include any of the following:
1. They are diagnosed with COVID-19 2. Their spouse or dependent is diagnosed with COVID-19
3. They experience adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19 or other factors determined by the IRS. This provision applies to distributions from January 1, 2020 (rather than the date of enactment of the CARES Act) through December 31, 2020. Income attributable to the withdrawal will be taxable over three years (unless the taxpayer elects otherwise), and the taxpayer may recontribute the amount within three years without regard to the cap on contributions. Employers may rely on an employee's certification that the reason for the withdrawal is COVID-19 related. The bill also increases the maximum amount that an individual may borrow from a qualified plan for COVID-19-related reasons from $50,000 to $100,000 and allows an individual to borrow up to the present value of their nonforfeitable accrued benefit (rather than merely one-half of that amount, as under current law). Lastly, for individuals meeting COVID-19 need criteria who have an outstanding loan (on or after April 1, 2020), the law allows repayments due between April 1, 2020 and December 31, 2020 to be delayed for one year. Required minimum distributions will not be required for calendar year 2020. This provision was added for all retirement plans, both employer-sponsored and individual accounts. It was presumably added to allow retirees to avoid having to sell investments when the market is unusually low to make an RMD. All retirement-related changes are effective January 1, 2020. Employers have considerable time to draft and execute conforming plan amendments (the deadline is the last day of the first plan year beginning on or after 2022). It should be noted that employees executing retirement plan loans under the COVID-19 provisions will likely be “selling low” from a market perspective. Since market values have dropped off precipitously due to the COVID-19 crisis, the valuation of many holdings is significantly reduced. Unless the employee is withdrawing from a cash account within the retirement plan, taking a loan will require selling off invested assets, which, based on current market conditions, is significantly lower than prior periods. Thus, while taking a loan in these times may be necessary, it should be noted that doing so “locks in” market losses and takes away the ability to ride the investments back up over time.
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