Nearly A Year After the CARES Act, should Plans still CARE?
Erica Rice, CPA
03.08.21 | Assurance Chat
2020 was a very unique year that presented many new challenges. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was passed to provide fast and direct economic relief for those impacted by COVID-19. Relating to eligible retirement plans (including 401(k) and 403(b) Plans and IRAs), there were special considerations that Plan Administrators needed keep in mind for proper plan administration.
In general, the CARES Act provided for expanded distribution options and favorable tax treatment for up to $100,000 of coronavirus-related distributions from eligible retirement plans. It also increased the limit on the amount a qualified individual may borrow from a retirement plan (not including IRAs). Plan Sponsors were permitted to provide qualified individuals up to an additional year to repay plan loans. The 10% additional tax on early distributions did not apply to coronavirus-related distributions. Required Minimum Distributions for those over the age 70½ were waived during 2020.
Who is a Qualified Individual?
A qualified individual is eligible individual (or their spouse or dependent) who was diagnosed with COVID-19 by a Centers for Disease Control (CDC) approved test. Additionally, included are those who experience adverse financial consequences as a result of being quarantined, laid off, or furloughed due to COVID-19. Individuals who were unable to work due to lack of childcare are also eligible. Individuals also qualify if they experience adverse financial consequences as the result of the closing or reduced hours of a business they own.
Must Plans Adopt the CARES Act?
It is optional for employers to adopt the distribution and loan rules of the CARES Act. An employer is permitted to choose which aspects of and to what extent of the CARES Act, to amend the Plan. Employers may choose to only adopt the distribution features and not the loan provisions. Plan Administrators were able to take immediate action and do not need to have the plan formally amended until the end of 2022.
So… What Happens in 2021?
On December 21, 2020, Congress passed the Consolidated Appropriations Act (CAA) which impacts employee benefits in multiple ways. The largest aspect for retirement plans is that partial plan termination rules are relieved for events occurring between March 13, 2020 and March 31, 2021 if the number of active participants in the qualified plan on March 31, 2021 is at least 80% of the number on March 13, 2020. Effectively, this gives employers until March 31, 2021 to rehire laid off employees and avoid triggering a partial plan termination. Unfortunately, the relief for coronavirus distributions expired on December 31, 2020 and was not extended under the CAA.
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Erica Rice, an Audit Principal with more than 18 years of professional experience, plays an integral role is the Firm’s Employee Benefit Plan Practice. Erica has particular expertise in auditing and accounting for single and multiemployer employee benefit plans, labor unions, and not-for-profit organizations.