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How Does The CARES Act Impact Employee Benefit Plans?

April 21, 2020

Do you have an individual retirement account (IRA) or workplace retirement plan (401k)? If you’re wondering how the CARES Act impacts you, we’re here to help.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law March 27, 2020 to help those impacted by the COVID-19 pandemic.

The below coronavirus related relief is allowed for a plan participant, spouse or dependent who was diagnosed with SARS-CoV-2 virus or COVID-19 disease or experienced financial burden due to the virus/disease (because of inability to work due to reduced hours, furlough, lay-off, no childcare or loss of their business).

The provisions include:

  1. Hardship withdrawal penalty changes:
    1. Normally a 10 percent early withdrawal penalty applies to money withdrawn before a participant reaches the age of 59 1/2, with the CARES Act, a distribution up to $100,000 of the vested account balance from a retirement plan or IRA from January 1, 2020 to December 31, 2020 is allowed without the early withdrawal penalty.
    2. Federal tax is still owed on the distribution, however, if paid back to the plan within three years of the distribution, it will not be subject to federal income taxes.
    3. The Employee must certify that they satisfy the conditions for the distribution.
  2. Changes to loan terms:
    1. For loans made March 27, 2020 to September 23, 2020, the Plan Administrator has the option to increase the loan limit to the lesser of $100,000 (previously $50,000) or 100% of the participant’s vested account balance.
    2. Qualifying participants may delay payment for up to one year for scheduled repayments from March 27, 2020 through December 31, 2020, however, interest will continue to accrue during this period.
    3. The loan term may be extended for up to one year.
    4. If your plan does not currently allow loans, it can be amended by December 31, 2020 to include the loan provisions.
  3. Required minimum distributions (RMD):
    1. For 2020 RMDs are waived for defined contribution plans and IRAs.
    2. They will be considered eligible rollover distributions for 2020 if taken by participants.
  4. Inherited 401(k)s:
    1. Required distributions for individuals who have inherited 401(s) or IRAs can be suspended for 2020.
  5. Defined benefit plans:
    1. For single-employer defined benefit plans, the 2020 minimum required contributions are suspended to January 1, 2021.
    2. Interest will accrue on the deferred contributions from the original due date to the payment date.
    3. Plans should be amended for the adoption of the CARES Act, however amendments are not required until 2022.

Navigating through all of the information and programs available to impacted businesses may be overwhelming. KLR advisors are available to assist you navigate the best path forward during this unprecedented crisis. Questions on your individual situation? Reach out to us and visit our coronavirus resource center.

With a completely remote workforce our advisors are always available.

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