Fine-Tuning Implementation of the CARES Act
(Estimated reading time: 3 min 41 sec)
The coronavirus relief bill, known as the CARES Act, expanded access to retirement assets for participants who were impacted by the pandemic. The near-lightning speed of the bill’s drafting and passage meant that a number of provisions needed regulatory guidance.
The CARES Act was signed into law on March 27, 2020. Drafting this legislation was expedited, which means there is a limited congressional record to clarify provisions. The IRS has issued two notices and a FAQ to clarify how defined contribution (DC) plan sponsors should implement the provisions, touching on required notices, tax reporting, and recordkeeping.
What was covered: The notice addresses how to process coronavirus-related distributions (CRDs) and more liberal loan provisions. These provisions are optional. You may find more information on the CARES Act provisions here.
What you need to know: This notice expanded the group of participants eligible to take CRDs or larger loans, or to suspend loan repayments, to include members of the participant’s household. Previously, the group was limited to the participant, spouse, and dependents.
The notice also addressed how loan suspensions and subsequent reamortization would be managed. Qualified individuals are allowed to suspend repayments until the end of 2020. Loan repayments would not be required until 12 months following the suspension, and the loan term may be extended by 12 months.
The notice provided a sample self-certification statement for participants looking to take advantage of the CARES Act provisions.
What to do: Based on how the law was drafted, the plan sponsor and/or its recordkeeper will need to be able to track a floating repayment date for CRDs—the act permits participants to repay CRDs within three years of the date the distribution was taken. This additional level of complexity may create risk for plans that allow participants to repay their CRDs.
Plan sponsors will need to ensure tax reporting for CRDs is accurate and that loan suspensions are administered correctly by their service providers. Plan sponsors or their recordkeeper will need to establish a means of tracking who is an eligible participant, their self-certification, and the date CRDs were taken.
What was covered: The IRS provided additional guidance on waived required minimum distributions (RMDs). RMD payments are required annually and can be paid at any time in the tax year, although the initial distribution can be delayed until April 1 of the next tax year. RMDs are based on the account balance as of December 31 of the prior year and cannot be rolled over.
What you need to know: The CARES Act waived 2019 RMDs that would be paid in 2020. However, due to the timing, participants who were required to take a distribution by April 1, or had regularly scheduled RMDs, may have been forced to take a distribution at a time when the market was experiencing severe dislocation. While RMDs were suspended during the Global Financial Crisis in 2009, and participants were allowed to repay the RMDs, the CARES Act did not explicitly allow this option. The IRS Notice specifically allows participants to roll their RMDs into a DC plan, if permitted, or an IRA by Aug. 31, 2020. It also addressed the later starting date established by the SECURE Act, passed in December 2019, and various nuances of tax reporting.
What to do: The notice included a model amendment that plan sponsors can use to amend the plan document. Plan amendments related to the CARES Act must be adopted no later than the last day of the first plan year beginning on or after Jan. 1, 2022 (Jan. 1, 2024, for governmental plans).
The IRS has indicated that RMD failures are one of the most common administration errors. The many changes to RMD processing due to the CARES Act and SECURE Act add additional complexity and potential for error. Plan sponsors may wish to audit RMDs in 2020 and 2021 to ensure those payments are processed and reported correctly.
The pandemic has forced plan sponsors and recordkeepers to react quickly and agilely. Deploying the CARES Act provisions required prompt action, but the underlying support infrastructure may still be in development (e.g., tax reporting is not required until 2021). While many plan sponsors delegate authority to administer the plan to their recordkeeper, the fiduciary retains the responsibility to ensure accurate administration. Plan sponsors should work with their providers to understand how the CARES Act provisions are implemented, tracked, and reported. Plan sponsors should also consider auditing these provisions to confirm they were processed correctly.