With a new COVID-19 tax law seemingly coming out every couple of days and with guidance on those new laws seemingly being released every few hours, we wanted to keep plan administrators informed of all changes as they stand today.  First though, we want to note that while taxes due April 15, 2020 have been extended to July 15, 2020, no current law or guidance has been released that would delay the filing for any ERISA related returns.  We expect communication soon regarding extension, but for now, the normal deadline for a 12/31/2019 year end plan is still July 31, 2020 while the extended deadline is still October 15, 2020.

Penalty-Free Coronavirus-Related Distributions

  • The CARES Act now allows for distribution taken between January 1, 2020 and December 31, 2020 to be 10% penalty free if the distribution qualifies as a “coronavirus-related distribution” made to a “qualified individual”
  • A “qualified individual” is defined as a 1) participant who has experienced adverse financial consequences resulting from a reduction in work hours; been laid off, quarantined, or furloughed; or is unable to work due to lack of childcare on account of the disease; 2) a participant, spouse or dependent who has been diagnosed with the virus.
  • The aggregate amount of Coronavirus-Related distributions received by a participant from all plans maintained by the plan sponsor and its controlled group members is $100,000.  Your plan can adopt a lower limit.
  • Your plan can rely on a certification from an employee that the distribution was coronavirus-related.
  • Your plan is not required to allow for these type of distributions.  If you would like to make them available to your participants, then you must amend your plan by the end of the plan year that begins on or after January 1, 2022 and operate the plan consistent with the amendment on and after the effective date of the amendment.

Repayment/Taxation of Coronavirus-Related Distributions

  • The CARES Act allows an individual who has received this type of distribution to repay it to the plan within three years to avoid income taxation.  The repayment would be treated as a rollover contribution by the plan.
  • If not repaid, the distribution will be taxed ratably over a three-year period, unless the individual elects to have it taxed in the year of distribution.
  • More guidance will be released on the exact specifics of the mechanics of repayment and taxation at a later time.  At this time, it’s not clear if your plan is required to accept repayment of the distributions.

20% Withholding Not Applicable

  • A Coronavirus-Related Distribution is not eligible to be rolled over into another benefit plan, therefore, the mandatory 20% withholding on a distribution to an individual is not required.

Temporary Loan Dollar Increase – for qualified individuals

  • The CARES Act temporarily increased the maximum amount of a loan to $100,000 starting on the date of enactment and ending 180 days later.
  • The CARES Act also temporarily allows a participant to borrow up to the lesser of $100,000 or 100% of their account balance, rather than 50% of their account balance under current rules.
  • Your plan can rely on a certification from an employee that the distribution was coronavirus-related.
  • Your plan may or may not need to be amended to account for this change. If your plan document references the IRS code limits, then amendment may not be necessary as the increase would apply automatically.  If your plan document references specific dollar amounts, then your plan would probably require amending.  As with distributions, amendments can be made at a later date as long as the plan is consistently being operated under the guidelines moving forward.

Loan Repayment Delays – for qualified individuals

  • The CARES Act delays for one year the due date of any loan repayments otherwise due between March 27, 2020 and December 31, 2020 for any loan outstanding on or after the CARES Act enactment date
  • It’s not clear at this time if you are allowed to opt out of this portion of the CARES Act.

Required Minimum Distributions – all participants

  • To address the fact that plan participants might be forced to receive RMDs based on 12/31/2019 plan values paid by funds from their plan currently reduced from recent market turmoil and loss, the CARES Act allows plans to suspend making RMDs in 2020.  This suspension applies to all participants 70 ½ and older and participants who turned 70 ½ and older in 2019 and had yet to receive their 2019 distribution.  Again, your plan has the option to suspend RMDs for 2020.

401(k) Contributions Extension

  • IRS Notice 2020-18 extends the due date for federal tax returns and tax payments otherwise due on April 15, 2020 to July 15, 2020.  This also extends the due date for employer 401(k) contributions to be paid in order to qualify for deduction.

2019 Excess Elective 401(k) Deferrals

  • Payment of excess elective 401(k) deferrals must still be made by April 15, 2020.