Retirement and Pension Provisions in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

Retirement and Pension Provisions in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

April 1, 2020
Retirement and Pension Provisions in the Coronavirus Aid,
Relief, and Economic Security Act (CARES Act)
Congress provides a variety of tax incentives for employers
 The maximum loan amount is the lesser of half of the
to offer retirement plans and for individuals to save for their
participant’s vested account balance or $50,000.
retirement. In addition, a number of restrictions exist to
ensure that retirement funds are used for retirement
 Loans must be repaid in level installments over five
purposes. The Coronavirus Aid, Relief, and Economic
years. Longer terms are permitted if loans are used for
Security Act (CARES Act; P.L. 116-136) contains several
the purchase or construction of a principal residence.
provisions that affect pensions, retirement plans, and
Individual Retirement Accounts (IRAs). Among other
COVID-19 Related Distributions Exempt from 10%
provisions, the CARES Act includes an exemption to the
Tax Penalty
10% tax penalty for early withdrawals from retirement
Section 2202 of the CARES Act exempts qualified
accounts for individuals affected by COVID-19, one-year
individuals affected by COVID-19 from the 10% early
relief from Required Minimum Distributions (RMDs) for
withdrawal penalty for distributions (1) up to $100,000 and
all retirement plan account holders, and a delayed due date
(2) taken from January 1, 2020, through December 31,
for employer contributions to private-sector defined benefit
2020. Qualified individuals are individuals (1) who tested
(DB) pension plans.
positive for COVID-19 or those with a spouse or dependent
who tested positive for COVID-19, (2) facing financial
Withdrawals and Loans from Retirement difficulties due to being quarantined, furloughed, laid off,
Plans
or unable to work due to lack of child care or reduced work
Individuals can save for retirement by contributing to tax-
hours as a result of COVID-19, or (3) whose business
advantaged defined contribution (DC) accounts (e.g.,
closed or reduced hours as a result of COVID-19. Plan
401(k) plans) and IRAs. Employers often match some or all
administrators may rely on employees’ certifications as
of an employee’s contributions to DC accounts.
proof that they are qualified individuals.
To discourage pre-retirement withdrawals, the Internal
Qualified individuals must include the amount distributed
Revenue Code (IRC) generally imposes a 10% penalty on
in their taxable income; however, they can report it as
the taxable amount of early withdrawals, which are
income either in the year received or equally over a three-
withdrawals before an individual reaches age 59½, dies, or
year period. In addition, part or all of the distribution can be
becomes disabled. The penalty does not apply if the reason
repaid to a qualified retirement plan within three years of
for the distribution is listed in 26 U.S.C. §72(t).
receiving the distribution. Amounts that are repaid are
treated as a trustee-to-trustee rollover (as if they were made
Individuals who make early withdrawals are subject to rules
directly from one financial institution to another, otherwise
that vary by plan type, the circumstances warranting a
individuals might violate rules on rollovers or contribution
withdrawal, and plan-specific rules. IRAs generally have
limits).
fewer restrictions on early withdrawals than DC plans. For
example, individuals may withdraw funds from an IRA for
Nonqualified individuals may have the option to take a
any reason—though generally with a penalty—but pre-
hardship distribution on account of a federally declared
retirement withdrawals from a DC account (1) must be
disaster, although this may vary based on whether their (1)
allowed by the plan and (2) must generally be on account of
state of residence qualifies for individual assistance under
an employee’s financial hardship (referred to as a hardship
the disaster declaration and (2) retirement plan allows for
distribution).
such distributions. Nonqualified individuals may be subject
to the 10% early withdrawal penalty on the amount
Loans are not permitted from IRAs. DC plans may—but are
distributed.
not required to—allow participants to borrow from their
accounts. Loans may be preferred to early withdrawals
Loan Rules Modified for Qualified Individuals
because amounts borrowed can be repaid to the individual’s
Section 2203 of the CARES Act modifies rules governing
account. However, in the case of a DC plan loan default
DC plan loans for qualified individuals. Qualified
(e.g., following job loss, the borrower fails to repay the
individuals are defined in the same way as above. The
outstanding loan balance by the deadline for that year’s tax
following provisions apply:
return), the loan balance must be included in taxable
income and a 10% tax penalty applies. Provisions for DC
 The maximum loan balance for loans taken within 180
plan loans under current law and regulations include the
days of the bill’s enactment (March 27, 2020) is
following:
increased to the lesser of the participant’s entire vested
account balance or $100,000.
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Retirement and Pension Provisions in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
 For new or existing loans, the due dates for payments
example, if a plan is less than 60% funded, it may not
due on or after the bill’s enactment through December
provide benefits that have been promised in the event of a
31, 2020, are extended by one year. Subsequent
plant closing, referred to as shutdown benefits.
payments are also delayed by one year.
Contribution Due Date Delayed and Plans May Use
Required Minimum Distributions
2019 Funding Percentage
Required Minimum Distributions (RMDs) are annual
Section 3608 of the CARES Act allows contributions that
withdrawals that individuals with certain retirement
are due in calendar year 2020 to be made with interest on
accounts are required to begin making after reaching a
January 1, 2021.
certain age. The RMD assures that tax-deferred retirement
accounts established to provide income during retirement
Section 3608 of the CARES Act also allows plans to use
are not used as permanent tax shelters or as vehicles for
the funding percentage for the 2019 plan year rather than
transmitting wealth to heirs. Failure to take the RMD results
the 2020 plan year (which would likely be lower) in
in a tax penalty equal to 50% of the amount that should
determining whether plans must impose benefit restrictions.
have been distributed.
Expanded Authority for the Secretary of
The RMD for a year is calculated by dividing (1) the
Labor to Delay Deadlines
account balance at the end of the immediately preceding
Private-sector pension plans face a variety of deadlines to
calendar year by (2) the distribution period provided in the
meet the requirements of the Employee Retirement Income
applicable Internal Revenue Service (IRS) Life Expectancy
Security Act of 1974 (ERISA; P.L. 93-406). Section 518 of
Table.
ERISA (29 U.S.C. §1148) gives the Secretary of Labor the
authority to delay, for up to one year, any action required
RMD rules apply to DC accounts (such as 401(k), 403(b),
under ERISA in the case of a presidentially declared
and 457(b) accounts) and traditional IRAs. RMDs do not
disaster or a terroristic or military action.
apply to Roth IRAs, but do apply to Roth 401(k) accounts.
Individuals must take their first RMD by April 1 of the year
Authority to Delay Deadlines for Public Health
following the year in which they turn age 72 (or age 70½
Emergency
for those who turned 70½ before January 1, 2020; the
Section 3607 of the CARES Act expands the events that
SECURE Act, passed as part of the Further Consolidated
allow the Secretary of Labor to delay deadlines under
Appropriations Act, 2020, (P.L. 116-94) increased the age
ERISA to include a public health emergency declared by
at which RMDs must begin from 70½ to 72). Participants
the Secretary of Health and Human Services.
(other than individuals who own 5% or more of a company)
in employer-sponsored plans who are still working past the
Application of Charity Pension Funding
age of 72 can delay distributions until April 1 following the
Rules
year that they stop working (if the plan allows).
Certain cooperative and charitable organizations—such as
agriculture, electric, and telephone cooperatives and certain
RMDs Suspended for 2020
501(c)(3) charities—may follow special pension funding
Section 2203 of the CARES Act suspends RMDs for 2020.
rules. These plans are referred to as Cooperative and Small
A special rule applies the RMD suspension to individuals
Employer Charity (CSEC) plans. P.L. 113-235 expanded
who took their first RMD from January 1, 2020, to April 1,
the definition of CSEC plans to include plans maintained by
2020. Individuals who received their RMDs in 2020—prior
any employer that meets several criteria. It appears that the
to the enactment of the CARES Act—may be able to roll
Boy Scouts of America Master Pension Trust is the only
over these amounts to IRAs or other retirement plans if
plan that has met these expanded criteria.
rollover rules are followed. Among other requirements,
rollovers must be completed within 60 days of the
CSEC Plan Definition Expanded
distribution. The CARES Act does not contain a provision
Section 3609 of the CARES Act expands the definition of
for individuals to recontribute their distributions already
CSEC plans to include a charitable organization whose
received in 2020.
“primary purpose is providing services with respect to
mothers and children,” and has been in existence since
Single-Employer Pension Plan Funding
1938. It appears that March of Dimes fulfills this
Single-employer DB pensions are plans sponsored by one
requirement. It is unclear whether any other charities meet
employer for the benefit of its employees. Sponsors of these
the definition.
plans are required to contribute to their plans each year. In
general, the amount of the required contribution is equal to
For More Information
the value of benefits earned by participants in the year plus
 CRS In Focus IF11472, Withdrawals and Loans from
a share of any prior years’ plan underfunding (e.g., from
Retirement Accounts for COVID-19 Expenses
decreases in the value of plan investments or changes to
plan assumptions). Failure to make the full contribution
may result in an excise tax.
John J. Topoleski, Specialist in Income Security
Elizabeth A. Myers, Analyst in Income Security
Plans with funding levels below specified levels must
IF11482
restrict certain benefits under 26 U.S.C. §436. For

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Retirement and Pension Provisions in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

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https://crsreports.congress.gov | IF11482 · VERSION 1 · NEW