CARES Act Summary
The Coronavirus Relief, Aid, and Economic Security Act (CARES Act) was signed into law on March 27, 2020. This information has been updated to reflect additional guidance published by the IRS on June 19 and June 23, 2020. The CARES Act is specifically designed to provide relief to businesses and individuals affected by COVID-19.
RETIREMENT PLAN PROVISIONS
This new law includes special provisions that may impact your retirement plan.
- Retirement Plan Loans
- Required Minimum Distributions (RMDs)
- IRA Contribution Extension
These provisions apply to qualified plans, including 401(k) and profit-sharing plans, 403(b) plans, 457(b) governmental plans and individual retirement accounts (IRAs).
The CARES Act includes special COVID-19-related distribution rules designed to provide participants with greater access to their retirement plan benefits, and more flexibility to receive those funds without adverse tax consequences.
This provision allows qualifying individuals access to retirement plan distributions to provide financial relief during this time of crisis. Individuals can withdraw up to $100,000. The 10% early withdrawal penalty is waived, and the 20% mandatory withholding rules do not apply. These withdrawals can be treated as taxable income over a three-year period beginning with the year the distribution was made. Withdrawals may be repaid within three years and treated as a rollover contribution — also to avoid taxation.
Required Minimum Distribution (RMD) provision
Due to the current market conditions, RMDs for defined contribution plans, 403(b) plans, 457(b) governmental plans and IRAs may be waived for the 2020 calendar year (including RMDs to beneficiaries being paid over a 5-year period). The waiver also applies to individuals whose first RMD was due by April 1, 2020 and who did not take their RMD in 2019. This provision does not apply to defined benefit plans.
New Update as of 8/10/2020: This is an update about IRS guidance that has been issued since the CARES Act passed earlier this year. Specifically the guidance pertains to RMDs which were suspended for 2020. Since then, through a couple additional guidance releases, we have received further clarification and an expansion of opportunities to recontribute. Please keep in mind CUNA Mutual Group is still processing the specific interpretation of these releases.
This update covers further explanation in the latest issue from IRS Notice 2020-51.
The main topic addressed by this latest Notice is permitting unwanted RMDs distributed in 2020 to be rolled over or replaced, under certain conditions, through August 31, 2020. The 60-day rollover period is waived through August.
- If you recall, previous guidance permitted a more restrictive window to replace or rollover unwanted RMDs. This update permits any 2020 RMD received to date (now including January and early Feb distributions) to be rolled over or returned, if the custodian and investment allowed recontribution.
- Guidance now permits multiple rollovers within the past 12 months (usually this is restricted to 1 rollover per 12 month period), IF;
- Each distribution is part of a required 2020 RMD, such as multiple monthly or quarterly payments that make up the full 2020 RMD, and
- All but one distribution is returned to the distributing IRA – this is contingent on the custodian and investment permitting recontribution.
As examples, SPIAs and DIAs would not permit a return of unwanted RMDs and only one distribution could be rolled over to another IRA. But a deferred annuity set up to distribute systematic withdrawals making up the 2020 RMD could potentially permit repayment.
- In the case of qualified plan (like 401k, TSA, etc.) RMD distributions can be rolled over to other investments as well as being rolled back into the same plan (plan limitation may apply).
- Non-spouse Beneficiary IRA RMDs can now be repaid, but must go back into the distributing source (again, assuming they can). They cannot be rolled over to a new Beneficiary IRA.
Coronavirus-Related Plan Loan Provisions
The CARES Act provides that plan participants who are Qualified Individuals can delay repayments due between March 27, 2020 and December 31, 2020 for one year. Repayment following the end of the suspension will reflect interest accrued, however the normal 5-year period for loan repayment will also be extended by 1 year. The act also expands loan limits to the lesser of $100,000 or 100% of the Qualified Individual’s vested benefit under the plan.
IRA Contribution Extension
Contributions to IRA accounts for the 2019 tax year that would have been due April 15 can now be made until July 15. The July 15 extension could provide additional benefits for taxpayers looking to save for retirement through an IRA.
CHARITABLE CONTRIBUTION DEDUCTIONS AND HEALTHCARE ADJUSTMENTS
The CARES Act allows for charitable contribution deductions of $300 above the line, permitted by anyone, with no itemization of deductions required. Itemized charitable deduction limitation has been increased to 100% of Adjusted Gross Income for 2020.
Health Savings Accounts (HSA’s) and Flexible Spending Accounts will reimburse for over-the-counter medical products. HSA’s can also be used for telehealth services.
TAX FILING PROVISIONS
The Treasury Department and the Internal Revenue Service are providing special tax filing and payment relief to individuals and businesses in response to the COVID-19 Outbreak. The filing deadline for tax returns has been extended from April 15 to July 15, 2020. Taxpayers can also defer federal income tax payments due on April 15, 2020, to July 15, 2020, without penalties and interest, regardless of the amount owed. This deferment applies to all taxpayers, including individuals, trusts and estates, corporations and other non-corporate tax filers as well as those who pay self-employment tax.
STUDENT LOAN PROVISIONS
The student loan provisions will allow most borrowers to suspend their monthly payments on federally backed loans through September 30, 2020 with no penalties – and is retroactive to March 13, 2020.
The suspension of payment and interest accrual does not apply to private loans or Public Service Loan Forgiveness (PSLF).
Employee Student Loans: From March 27 through Dec. 31, 2020, the CARES Act expands tax code Section 127 to allow employers to reimburse employees up to $5,250 for most student loan payments, which can be excluded from taxable income.
The $5,250 limit is the amount that employers may currently contribute, tax-free, for tuition assistance under Section 127. Through the end of 2020, it becomes the combined limit for loan repayment assistance or other education-assistance payments employees receive.
SMALL BUSINESS LOAN PROVISIONS
Small businesses are the lifeblood of the American economy and helping them survive through this period of uncertainty has resulted in specific provisions inside the CARES Act to extend a lifeline. Why is this important? They account for 99% of businesses in the country.1 55% of the American workforce is employed by small businesses, and accounts for 66% of all job creation.2
Paycheck Protection Program – Available through June 30, 2020
This program offers small businesses a loan to help them keep their workers on the payroll. The Small Business Administration (SBA) will forgive loans if all employees are kept on the payroll for 8 weeks. The loans can also be used for rent, mortgage interest or utilities. Loan payments may also be deferred for 6 months, has a maturity of 2 years and an interest rate of 1%. Small businesses with 500 or fewer employees - including nonprofits, veterans' organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors - are eligible. Businesses with more than 500 employees are eligible in certain industries.
Emergency Economic Injury Grant
This loan advance will provide up to $10,000 of economic relief to businesses that are currently experiencing temporary difficulties including loss of revenue as a result of the coronavirus. This loan/grant is available to businesses with less than 500 employees, including private non-profit or veteran organizations. The loans may be used to pay for expenses that could have been met had the disaster not occurred, including payroll, paid sick leave to employees, increased production costs due to supply chain disruptions, and business obligations, including debts, rent and mortgage payments. The loan advance will not have to be repaid.
Small Business Debt Relief Program
Under this provision, the Small Business Administration (SBA) will cover all loan payments for existing SBA borrowers, including principal, interest and fees, for six months. This relief will also be available to new borrowers who take out an SBA loan within six months after March 27, 2020.
Additional relief may be available through small business lenders who extend the duration of existing loans beyond existing limits, and a temporary extension on certain reporting requirements for new and existing borrowers.
UNEMPLOYMENT INSURANCE PROVISIONS
On March 18, 2020, President Trump signed into law the Families First Coronavirus Response Act (FFCRA), which provides additional flexibility for state unemployment insurance agencies and additional administrative funding to respond to the COVID-19 pandemic. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27. It expands states’ ability to provide unemployment insurance for many workers impacted by the COVID-19 pandemic, including for workers who are not ordinarily eligible for unemployment benefits including gig workers, self-employed or who otherwise would not qualify for unemployment benefits.
To be eligible (among other requirements) individuals must demonstrate that they are otherwise able to work and available for work within the meaning of applicable state law, except that they are unemployed, partially unemployed, or unable or unavailable to work because of COVID-19 related reasons.
Related Retirement Plan Considerations
In order to conserve business-related assets, some plan sponsors may consider suspending their employer contributions (i.e. 401(k) matching, profit sharing, and/or safe-harbor contributions). This action will require a plan amendment in addition to participant notification — at least 30 days prior to effective date. It is important to recognize that adjusting or suspending contributions may involve additional legal requirements related to the Code.
For plans with a minimum funding requirement (Money Purchase Pension, Target Benefit or Defined Benefit), contributions may be postponed until January 1, 2021. Discuss important dates and conditions with your plan consultant.
There is a distinct difference between being laid-off and being furloughed. Laying off an employee is considered a formal separation from service, whereas a furlough involves a non-paid leave. Their treatment under this act follows those conditions of employment status.
Employers should be aware that a partial plan termination may be triggered by a 20% workforce reduction. If this happens, employees will be entitled to full vesting regardless of years of service.
Employers can proactively terminate their plan but must adopt a formal resolution to do so. Terminating the plan for short-term relief may not save money – it may be just as cost effective to eliminate mandatory contributions or consider plan design options to avoid long-term consequences.
Qualifying Individual Description
An individual who is, or whose spouse or dependent is, diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the Centers for Disease Control and Prevention.
An individual who experiences adverse financial consequences because of being quarantined, furloughed or laid off, or having work hours reduced due to the virus; being unable to work due to lack of childcare on account of the virus; the closing or reduced hours of a business owned or operated by the individual due to the virus; or other factors determined by the Secretary of the Treasury.
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