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How New "CARES" Act Impacts Retirement Plans


On March 27, 2020, the third major piece of COVID-19 legislation was passed by Congress and will be signed into law by the President imminently, the Coronavirus Aid, Relief and Economic Security ("CARES") Act.

What you need to know:

What's Covered

Congress has authorized 401(k), 403(b), governmental 457(b), and certain other retirement plans to offer expansive "Coronavirus-related" distribution availability, participant loan options and relief from the minimum required distribution requirements for a limited period of time. "Coronavirus-related" means:

  • The participant, spouse or dependent has been diagnosed with COVID-19 or SARS-CoV-2, OR
  • The participant experiences "adverse financial consequences" as a result of being quarantined; has their work schedule affected due to those viruses; or is unable to work because of the lack of childcare.

A plan administrator may rely upon the employee's certification in determining whether any distribution is a Coronavirus-related distribution.

Distribution Options

Participants may be permitted to take Coronavirus-related distributions on or before December 31, 2020.

  • The distributions may be taken from all sources in their retirement plans.
  • The distributions may total up to $100,000 in the aggregate.
  • The distributions will not be subject to mandatory 20% withholding that often applies to plan distributions.
  • These distributions will not be subject to the 10% tax for early withdrawal.
  • The income tax resulting from these withdrawals can be spread over three tax years.
  • The distributions may be repaid in whole or in part over three years, with the taxes on the distribution being effectively reversed.

Loan Options

Participants may be permitted to take greater Coronavirus-related loans during the one hundred and eighty (180) day period following the enactment of the Act.

  • Participants may be permitted to take loans of up to $100,000 (up from $50,000) and the loan amount need not be limited to one-half of the participant's vested balance.
  • The repayment period for those affected can be extended by one year, and the loan can be reamortized accordingly. This can apply to existing loans that become due prior to December 31, 2020 as well as new loans.

Temporary Waiver of Required Minimum Distributions

Defined contribution plans, governmental 457(b) plans and individual retirement plans are granted a temporary waiver of the minimum required distribution rules for 2020.

  • Participants may have an opportunity roll certain amounts paid in 2020 (including those paid by April 1, 2020 for the 2019 required minimum distribution) back to a plan or IRA.

Funding Relief for Defined Benefit Plans

A defined benefit plan may delay certain contribution obligations until 2021 and may determine funded status (which can affect certain distribution availability) using the adjusted funding target attainment percentage for the plan year that ended in 2019.

Employer Actions

As is typical with these measures, they are entirely optional. But, we do expect most employers will strongly consider them. Retirement plans may adopt these rules immediately, provided the plan is amended by the last day of the first plan year beginning on or after Jan. 1, 2022, which is the deadline for SECURE Act changes.

In evaluating which aspects of the Act to adopt, employers may want to consider that many participants may be taking these distributions at the worst possible time from a market perspective -- when the markets are significantly depressed. As a consequence, the funds they receive will not have the opportunity to bounce back as the markets (hopefully) settle down and recover. As a result and while helpful to plan participants in the short-term, their long-term retirement positions will likely take a disproportionately larger hit.

For more information on how the CARES Act may impact your employee benefit plans, please contact your local Quarles & Brady attorney or:

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