How the CARES Act Affects Retirement Plans

Many of our clients are feeling the far-reaching affects of COVID-19, both from a health standpoint and a financial one. As a 401k TPA (Third Party Administrator) of retirement plans for dozens of organizations, the staff at PlanPerfect Retirement believe it’s important to try to unravel the confusing language of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act,) passed on March 27. The Act not only provides financial relief for individuals through stimulus payments and business loan assistance, it also provides several provisions regarding retirement accounts.

We want to ensure our plan sponsoring clients understand how it affects their retirement plans and that they can explain the provisions to employees participants in the plan, should they need to take advantage of them.

In a recent white paper by Ilene H. Ferenczy, J.D., CPC, APA, she outlines how the CARES Act affects both business owners and employees. Ferenczy is a nationally-known thought leader in the qualified retirement plan arena and a managing partner of Ferenczy Benefits Law Center LLP, an employee benefits law firm.

What CARES Did to Help 401k Plan Individual Participants

Participant employees in 401k and other retirement plans who have been negatively impacted by the coronavirus are able to take advantage of several benefits provided by the CARES Act. This includes individuals who:

• Have been officially diagnosed with the coronavirus.
• Who have a spouse or dependent who has been officially diagnosed with coronavirus.
• Who has suffered financial hardships because of the pandemic such as laid off, furloughed, quarantined, inability to work due to childcare, or owns a business that had to close or reduce hours.

There are four benefits outlined in the white paper that apply directly to these individuals.

1. Distributions.
   The CARES Act provisions allow distributions of retirement accounts such as 401k, 403(b) or government 457(b) plans to individuals without penalties regardless of age. It also reduces the tax burden on those distributions by allowing taxes to be spread out over a few years and/or treated as a tax-free rollover if paid back within three years.
2. Loans.
   Participants in 401k TPAs can now borrow more against their retirement accounts and they don’t have to make payments on those loans for a full year. Additionally, the plan sponsor doesn’t need to modify the plan in order for the individual to complete the loan.
3. Required Minimums
   With the CARES Act provisions, individuals 70.5 years and older are no longer required to take the annual required minimum distribution (RMD) in 2020. If you already took your RMD this year, your 401k TPA will help you roll it back into the plan or another retirement plan. This means that you won’t have to claim that additional income and you also won’t have to forfeit your deflated investments, giving time for market recovery.

Consult with your 401k Third Party Administrator to decide if a loan or distribution is better for your particular situation. In general, Plan Perfect Retirement experts recommend loans if you believe you’ll be able to pay the loan back during the extended repayment period. If not, the distribution may make more financial sense for you.

What CARES Did to Help Plan Sponsors

Besides helping individual participants in retirement plans, the CARES Act also allowed two provisions which benefit the employers who sponsor these plans.

1. Funding Delay
   Employers are allowed to postpone the funding of their 401k or other plans in order to hopefully avoid the expense during the times when cash flow may be challenging.
2. AFTAP Adjustment
   The Adjusted Funding Target Attainment Percentage (AFTAP) is an important ratio when it comes to funding your retirement plans. This number compares the defined benefit plan assets to the benefits earned by plan participants. With the sharp decline in the market, this ratio could require additional funding for the plan. CARES Act is allowing 401k TPAs to use last year’s AFTAP number to avoid or at least delay any impact the market drop may have on funding.

Speak to your third party administrator at PlanPerfect Retirement to review potential action you may want to take that may limit an increase in funding requirements such as freezing your plan before the beginning of June.

Contact PlanPerfect To Discuss Other Coronavirus-Related Issues

Regardless of these benefits for individuals and plan sponsors, the pandemic will likely have a significant effect on business operations moving forward in the months and years ahead. We encourage you to reach out to your PlanPerfect Retirement specialist to discuss other coronavirus-related issues. As your 401k TPA, we’re here to make sure we help you minimize the economic impact of the virus. We may want to consider reducing 401k and profit-sharing contributions or suspending Safe Harbor 401k contributions midyear.