On March 27, 2020, the Coronvirus Aid, Relief, and Economic Security Act (the “CARES Act”), became Public Law 116-136. The CARES Act is primarily concerned with providing financial relief for various sectors of the economy and individuals. As part of that relief, the CARES Act contains a few provisions impacting retirement plans, plan sponsors, and the treatment of distributions to individuals. This alert will review the plan distribution and loan provisions of the CARES Act.

• Coronavirus-Related Distributions

In general, the Internal Revenue Code (“Code”) and IRS regulations restrict the ability of pension plans to make distributions while a participant is employed. Thus, for example, a pension plan cannot make in-service distributions to a participant prior to age 59½. Furthermore, the Code provides an additional income tax of 10% on distributions from all types of plans prior to age 59½ (subject to certain specific exceptions) under Code section 72(t).

The CARES Act provides that a “coronavirus-related distribution” to an individual of up to $100,000 may be made with favored tax treatment. The favored tax treatment to the individual is as follows:

• • • • Exemption from the 10% additional tax of Code section 72(t);
      • Unless the individual elects otherwise, inclusion in income ratably over a 3-year period rather than being taxed in the year of the distribution;
      • The amount of the distribution may be repaid (in whole or in part) during the 3-year period beginning on the day after the date the distribution is received, and the amount repaid within this period will be exempted from income taxation and treated as an eligible rollover distribution though transferred in a direct trustee to trustee transfer within 60 days of the distribution); and
      • Exemption from the direct transfer rules under Code section 401(a)(31); the 402(f) notice requirement, and the withholding rules for nonperiodic payments under Code section 3405.

A coronavirus-related distribution is defined as a distribution from an eligible retirement plan made on or after January 1, 2020 and before December 31, 2020, to an individual

1. 1. Who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease (COVID-19) by a test approved by Centers for Disease Control and Prevention,
   2. Whose spouse or dependent is diagnosed with such virus or disease by such a test, or
   3. Who experiences adverse financial consequences, due to such virus or disease, as a result of (i) being quarantined, (ii) being furloughed or laid off or having work hours reduced, (iii) being unable to work due to a lack of child care, (iv) closing or reducing hours of a business owned or operated by the individual, or (v) other factors as determined by the Secretary of the Treasury.

The plan administrator of an eligible retirement plan may rely upon an employee’s certification that the employee satisfies the conditions in a., b., or c. above in determining that a distribution is a coronavirus-related distribution.

An eligible retirement plan is a plan described in Code section 402(c)(8)(B) and thus includes IRAs, Code section 403(b) annuities, and Code section 457(b) plans, as well as qualified plans. A coronavirus-related distribution will be treated as meeting the requirements of Code sections 401(k)(2)(B)(i), 403(b)(7)(A)(i), 403(b)(11), and 457(d)(1)(A) so those sections will not prohibit the distributions. Thus, for example, a coronavirus-related distribution can consist of elective deferrals under a section 401(k) plan.

CHEIRON OBSERVATION: The law does not require that a plan make a coronavirus-related distribution. However, it is likely that employees who have been laid-off or face high medical expenses as a result of the virus will be asking about distributions. No special rule was provided for defined benefit plans with respect to in-service distributions prior to age 59½. Therefore, plan sponsors may want to wait for official guidance from the IRS before making any coronavirus-related distributions from defined benefit plans. Plan sponsors may also want to consider adding an optional form of benefit for a short period that permits partial lump-sum distributions if the participant could otherwise start benefit payments.

• Loans From Qualified Plans

The CARES Act substantially increases the amount of a loan that could be made from a qualified plan to a participant. For the 180-day period beginning on March 27, 2020, the $50,000 limit of Code section 72(p)(4) has been increased to $100,000, and is limited to the entire nonforfeitable accrued benefit (in contrast to one-half of the nonforfeitable accrued benefit).

In addition, the CARES Act provides for a one-year delay in repayments for outstanding loans that would be due from March 27, 2020, through December 31, 2020. Subsequent repayments would need to be adjusted to reflect the delay in payment and any interest accruing.

• Temporary Waiver of Required Minimum Distribution Rules for Certain Plans and Accounts

The CARES Act amends the Code to provide a temporary waiver of the required minimum distribution under Code section 401(a)(9) for a defined contribution plan, an individual retirement plan, and an eligible deferred compensation plan described in Code section 457(b). In general, the required minimum distribution will not apply for 2020.

The waiver also applies to any distribution required to be made in 2020 by reason of a required beginning date occurring in 2020, and such distribution not having been made before January 1, 2020. Therefore, no required distribution would need to be made for an individual who attained age 70½ in 2019 and had a required beginning date of April 1, 2020.

Note that plan sponsors may implement the following above provisions immediately without first adopting authorizing plan amendments, even if the plan does not currently authorize participant loans or in-service distributions. However, plans must be appropriately amended by the last day of the 2022 plan year.

CHEIRON OBSERVATION: The waiver of the required minimum distribution does not apply to defined benefit plans. The likely reason is that only monthly benefits need be paid whereas the calculation of the required minimum distribution for a defined contribution plan would be based upon the relatively high level of the account balance at December 31, 2019, but would be taken out of the account after the recent downturn in the market.

Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Accordingly, we do not provide legal services or tax advice.