An Employee Benefit Plan Update: CARES Act Introduces ‘Coronavirus Distributions’

Published May 19, 2020 – The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law by the President of the United States on March 27, 2020. The CARES Act, among its many provisions, provides relief for both retirement plan participants and plan sponsors. A summary of the key provisions impacting retirement plans is provided below:

Coronavirus distributions

Section 2202 of the CARES Act introduces a new category of retirement plan withdrawals, referred to as coronavirus-related distributions (CRD). A CRD can be taken by a qualifying participant who meets one of the following criteria:

  • The participant has been diagnosed with the virus SARS-CoV-2 or COVID-19 disease by a test approved by the Centers of Disease Control and Prevention (CDC),
  • The participant’s spouse or dependent is diagnosed with such virus or disease by a test approved by the CDC, or
  • The participant experiences an adverse financial consequence as a result of:
    • Being quarantined,
    • Being furloughed or laid off,
    • Having work hours reduced,
    • Being unable to work due to lack of child care,
    • Closing or reducing hours of a business owned or operated by the participant, or
    • Other factors as determined by the Secretary of the Treasury

It is important to note that a participant does not have to experience a financial hardship to meet either of the first two criteria listed above.

CRDs must also be made from an eligible retirement plan on or after January 1, 2020 and before December 31, 2020, and, together with any other CRDs for the participant’s taxable year, cannot exceed $100,000.

CRDs also receive preferential tax treatment. Section 72(t) of the Internal Revenue Code (IRC) generally imposes a 10% additional income tax on any amount received by a participant as an early distribution from a qualified retirement plan. CRDs processed under the CARES Act are exempt from such penalty. Additionally, the normal 60-day rollover period has been extended specifically for CRDs to three years (ie. a participant, after receiving a CRD, has three years from the date of such CRD to make one or more contributions to an eligible retirement plan in an amount equal to the CRD), to provide an exemption from mandatory 20% withholding requirements.

Note on plan amendments – While these provisions can be implemented immediately, plans must formally amend their plan documents to allow for these provisions by the last day of the first plan year beginning on or after January 1, 2022 (or January 1, 2024 in the case of a governmental plan). During calendar year 2020, as long as the plan operates as though an amendment were being made to the plan immediately, plans will not be treated as failing to operating in accordance with their terms if they amend by this deadline.

This article is an excerpt from Dopkins COVID-19 Employee Benefits Newsletter.  To read the complete content, please click here.

For more information, please contact Vincent Pasini at vpasini@dopkins.com or Justin Renaud at jrenaud@dopkins.com.

About the Author

Justin S. Renaud CPA

Justin is a member of Dopkins Assurance Services Group. He helps provide management with financial information by researching and analyzing accounts and preparing financial statements.

About the Author

Vincent Pasini CPA

Vincent Pasini holds extensive experience in contract design, management and review/audit of financial statements.

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