CARES Act Passes Congress, Including Retirement Plan Relief

Plan sponsors who have faced regional natural disasters will be familiar with many of the relief provisions adopted by Congress, from the suspension of required minimum distributions to the doubling of loan limits.

The U.S. House of Representatives on Friday afternoon passed an unprecedented economic stimulus package aimed at blunting the financial impact of the global coronavirus crisis; President Donald Trump signed the legislation into law late Friday.  

Reflecting on this development after a week of furiously accelerated—and refreshingly bipartisan—legislative activity, Tom Foster, managing director of the Retirement Advisor University, says he has never seen an event quite like this in his 40-year career. The economic impact of the coronavirus outbreak has already been staggering—only adding to the physical and emotional toll of so many people falling ill around the world.

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“We are glad and relieved to see Congress has moved so quickly and in such dramatic fashion to deliver relief to the American people,” Foster says.

Alongside Foster, Michael Hadley, partner at Davis & Harman LLP, on Friday afternoon participated in a webcast hosted by the Defined Contribution Institutional Investment Association (DCIIA), called to discuss the stimulus package. He says retirement plan professionals who have previously navigated a severe natural disaster in their region will recognize many of the retirement plan-focused relief provisions that have now been enacted by Congress on a national level.

“If you’ve gone through that process, say in connection with hurricanes, fires or floods, this process will look pretty familiar to you,” Hadley says.

First and foremost, the “CARES Act,” as the stimulus legislation is being called, creates a new emergency retirement plan distribution option dubbed the “coronavirus related distribution,” or “CRD” for short. A CRD can be drawn from an employer sponsored retirement plan such as a 401(k) or from individual retirement accounts (IRAs), in any amount up to $100,000. Under the terms of the CARES Act, the normal 10% penalty tax levied on early plan distributions by the Internal Revenue Service (IRS) is waived. Furthermore, the individual taking a CRD can spread the reported income over three years for tax purposes, and the distribution also can be repaid within three years to avoid taxation.

To take advantage of the CRD, participants will have to self-certify that they either have contracted the COVID-19 disease, that a spouse or dependent has done so, or that they have lost a job or been furloughed or otherwise suffered a heavy financial burden because of the coronavirus pandemic.

Other provisions in the law double the amount of loans that participants can take—from $50,000 to $100,000—and extend outstanding loan repayment periods. Additionally, required minimum distributions (RMDs) are waived for the entirety of 2020.

Stakeholders in the retirement plan industry, which among many other sectors of the U.S. economy have been lobbying full force in support of the CARES Act, immediately commended Congress for its speed in passing the much-needed legislation.

“We applaud Congress for passing this critical legislation,” says Dale Brown, Financial Services Institute president and CEO. “During this time of economic uncertainty, Main Street Americans should have the ability to access and manage their savings and investments in a way that best meets their financial needs, whether it is taking a loan from their 401(k) or choosing not to withdraw funds.”

“The COVID-19 outbreak presents significant challenges that together we can conquer with effective policy solutions,” adds Edmund Murphy III, president and CEO of Empower Retirement. “It is important that we continue to move forward quickly and efficiently.”

Will Hansen, executive director of the Plan Sponsor Council of America, says broader economic relief provisions included in the CARES Act for small businesses and larger employers will hopefully help complement these retirement-focused provisions. But even with the record stimulus coming from the federal government, the road ahead will be challenging for everyone.

“Employers will consider steps such as suspending matches or even temporarily terminating plans,” Hansen says. “Administrators and advisers have already seen an increase in questions about these topics.”