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COVID-19, the CARES Act and Retirement Plan Issues

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The Coronavirus Aid, Relief and Economic Security Act (CARES Act) has a significant impact on employee benefit and retirement plans.  The following summary highlights the changes.

  1. Suspension of required minimum distribution rules

The required minimum distribution (RMD) rules for retirement plans, including 401(k) plans and IRAs, are waived for 2020. Therefore, plan participants who are over 70-1/2 do not have to take RMDs this year.  If they have already taken a 2020 RMD, they have 60 days to make a rollover to avoid income tax on the distribution.

  1. Extension of IRA contribution deadline

The deadline for making a 2019 IRA contribution is extended to July 15, 2020, consistent with the tax filing extension deadline for 2019 income tax returns.

  1. Plan loan requirements eased

For plan participants adversely impacted by Covid-19, the dollar limit on plan loans increases from $50,000 to $100,000, and the percentage limit increases from 50% of the participant’s account to 100%.  Also, for existing plan loans of impacted participants, repayments due in 2020 may be delayed for an additional year.-related plan withdrawals and penalty waiver

  1. Coronavirus-related plan withdrawals and penalty waiver

Retirement plan participants impacted by Covid-19 may take a “coronavirus-related distribution” of up to $100,000, and it will not be subject to the 10% penalty on early distributions before age 59-1/2 or automatic 20% federal income tax withholding.  To qualify, the participant, or his or her spouse or dependent must be diagnosed with Covid-19 and have adverse financial consequences from being quarantined, furloughed or laid off, or from a business closing or reduced hours.  Income tax on the distribution can be spread evenly over 3 years. Plan administrators may rely on a participant’s certification that he or she satisfies the conditions for a coronavirus-related distribution.

  1. Excess 401(k) plan deferrals

If 401(k) plan participants made excess pre-tax deferral contributions to the plan in 2019, the excess deferrals (and income) still must be distributed to the affected participants by April 15, 2020, in order to exclude the distributions from income.   This deadline has NOT been extended.

  1. Pension plan funding

Employers with defined benefit plans may elect to use the plan’s funded status for last year to determine funding-based benefit limitations under section 436 of the Tax Code for 2020.

Employers and plan sponsors have until the end of 2022 to amend their plan documents to reflect the necessary changes.  Please contact Vandeventer Black LLP if you have any questions or would like additional information on these issues.

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