Over the past few weeks, the 2019 Novel Coronavirus (or “Coronavirus”) has hit businesses (and employees) financially across the U.S. in an unprecedented fashion. Due to the Coronavirus pandemic, quarantines and shelter in place orders across the country, many businesses have come to a grinding halt and have been forced to furlough or lay off employees. All this uncertainty has caused individuals to look to other sources to supplement lost income. One such source is their retirement account.
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), passed by Congress and signed by President Trump on March 27, offers welcome relief to employees who may need to tap into their retirement accounts, including:
- Relief from the 10-percent early withdrawal tax for individuals looking to request an in-service distribution or a hardship withdrawal from their company retirement plan prior to attainment of age 59 1/2; and
- For individuals planning to request loans from their employer retirement plan, an increase in the funds available for loan withdrawal, and it also provides for a one-year delay in all loan repayments due through the end of 2020.
- Attainment of age 59 ½;
- Death;
- Disability; and
- Termination of employment.
- $50,000; or
- The greater of $10,000 or one-half of the present value of the participant’s nonforfeitable accrued benefit.
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- $100,000 (previously $50,000); or
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- The full present value of the participant’s vested accrued benefit (previously he greater of $10,000 or one-half of the present value of the participant’s vested accrued benefit).
- Who is diagnosed with Coronavirus by a test approved by the Center for Disease Control Prevention;
- Whose spouse or dependent (as defined in Code Section 152) is diagnosed with such virus or disease by such a test; or
- Who experiences adverse financial consequences as a result of Coronavirus due to:
- Quarantine, layoff, furlough, or having reduced work hours;
- Being unable to work due to lack of child care; or
- Closure or reduction of hours of a business owned or operated by an individual impacted by Coronavirus or other factors as determined by the Department of Treasury.
- With respect to the administration of retirement plan loans, retirement plan fiduciaries must carefully ensure that the loans in operation adherence to the terms of the plan governing loans. In addition to the duties of prudence and loyalty, a retirement plan fiduciary must also operate the plan in accordance with the terms of the plan document (unless a plan provision violates another law). This also includes any separate loan policies, which are essentially treated as part of the plan. There are IRS non-compliance penalties for failure to administer plan loans in accordance with the plan document that may implicate retirement plan fiduciary issues as well.
- Employers who elect to take advantage of the expanded loan and hardship withdrawal provisions provided for under the CARES Act must amend their plan to accommodate these new rules and provide communications (including, for example, a summary of material modifications) to participants that clearly delineate the new criteria for loans.
- As a best practice, employers who elect to amend their retirement plan to allow for expansion of loan rules under the CARES Act will need to ensure the new limits and requirements are properly applied in operation (including, for example, that no loan amounts to qualified individuals exceed $100,000 in the aggregate)
- For those non-Coronavirus related loans, employers are still responsible for enforcing loan repayment schedules that include level payments that must be made by the borrowing participants at least quarterly.
