CARES Act Expansion of In-Service Withdrawals Highlights 403(b) Plan Surrender Charge Disparity

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) includes provisions that allow retirement plan sponsors to provide plan participants the opportunity to withdraw funds from a defined contribution retirement plan — IRA, 403(b), 457(b) or 401(k) — if they are facing adverse financial consequences due to the COVID-19 pandemic.

Withdrawal Qualifications

The CARES Act allows for withdrawals of up to $100,000 from defined contribution retirement plans with the following tax benefits:

  • 10% tax penalty is waived, although withdrawals are still taxed as ordinary income.
  • Withdrawals will not be subject to mandatory withholding, which is typically 20% for 403(b) and 457(b) plans.
  • Total withdrawal amount can be spread over three years for tax purposes.
  • Participants have up to three years to return funds, which can be paid back to any eligible retirement plan.

To qualify for a coronavirus-related distribution under the CARES Act, you must have been affected in one of the following ways:

  • You have been diagnosed with COVID-19.
  • You have a spouse or dependent that has been diagnosed with COVID-19.
  • You have experienced adverse financial consequences because of quarantine, lay off, or a reduction in work hours due to COVID-19.
  • You are unable to work because of a lack of childcare due to COVID-19.
  • You are a business owner whose business has been shut down or is operating under reduced hours due to COVID-19.

403(b) Plan Considerations

Unlike other defined contribution retirement plans, 403(b) plans are administered by insurance companies. These plans typically feature annuities that require the payment of a surrender charge of up to 12% on asset withdrawals or transfers. Plan participants in a 403(b) will need to check with their plan administrator to determine if any surrender charges apply prior to making a withdrawal.

If surrender charges do apply, it could make better financial sense to take out a loan, a process which has been made easier for those affected by COVID-19 through the CARES Act. However, be aware that most 403(b) loans are collateralized — the insurance company will freeze a portion of the account and then make a separate loan that it earns profits on. Those with 403(b) plans will also want to make sure that a loan can continue to be repaid without triggering it as a taxable event in case the plan participant retires or is terminated.

If you are interested in making changes to the benefits your company offers, either in the middle of the year or at some point in the future, reach out to the experienced ERISA attorneys at Hall Benefits Law. We will help you review available options and make sure they’re offered in a compliant manner. Call 678-439-6236 today.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.