The Coronavirus Aid, Relief and Economic Security (CARES) Act, signed into law by President Trump, addresses several key issues introduced by the COVID-19 pandemic. The act acknowledges the economic impact the outbreak has had on the country and seeks to provide financial support to businesses, employees, individuals and families. Additionally, it specifically provides guidance on retirement and health care benefits, many of which MidAmerica administers on behalf of public sector employers and employees across the country. To help you better understand how the CARES Act impacts your 401(a), 403(b) or 457(b) retirement plan, we have highlighted the key takeaways below.
The CARES Act includes a provision that allows eligible plan participants impacted by COVID-19 to access their retirement funds—free of penalty—up to $100,000 between January 1, 2020 and December 31, 2020. To be eligible to make such a withdrawal, the individual participant, or his or her spouse or dependent, must have been diagnosed with COVID-19, the individual suffered adverse financial consequences due to COVID-19 (e.g., furlough, reduction in working hours, unable to work due to child care, loss of business, etc.), or other factors as determined by the Treasury Secretary.
The legislation also permits those individuals to pay tax on the income from the distribution ratably over a three-year period and allows individuals to repay that amount into the plan over the next three years (presumably filing for a tax deduction on the taxes they will have paid as a result of the premature distribution). Those repayments would not be subject to the retirement plan contribution limits.
Plan Loan Limits
The Act also doubles the current retirement plan loan limits to the lesser of $100,000 or 100% of the participant’s vested account balance in the plan. Individuals with an outstanding loan from their plan with a repayment due from the date of enactment of the CARES Act through December 31, 2020, can delay their loan repayment(s) for up to one year.
This only applies to loans made on or before September 23, 2020 (180 days following enactment of CARES) and is only for individuals who meet the same conditions outlined for the withdrawals noted above. Subject to plan approval, scheduled participant loan repayments due from March 27, 2020 (the enactment of CARES) through December 31, 2020, may be delayed for up to one year for qualifying employees. Interest continues to accrue during the period and the plan can extend the term of the loan for up to one year.
Required Minimum Distribution (RMD) Adjustments
The CARES Act waives the requirement for any RMD that is required to be paid in 2020. This includes an individual’s first RMD which is attributable to 2019 (not paid by January 1, 2020). If an RMD has already been received during 2020, then the participant may roll it over and defer paying taxes, including rolling back into the plan. We expect the IRS to extend the 60-day rollover period. For example, if a participant turned 70½ in 2019 and has a Required Beginning Date of 4/1/20:
- But has not yet taken the distribution— then no distribution is required in 2020 (for the 2019 distribution year)
- And has a distribution taken after 12/31/19, it is subject to the waiver for 2020 and the amount can be rolled over
- And the distribution was taken in 2019, no relief is available
An RMD is calculated using the balance of an individual retirement account on December 31 of the year prior to the date it must be distributed to a participant. The Dow Jones closed at 28,538 on December 31, 2019. On March 27, 2020, the Dow Jones closed at 21,636.78—a significant decrease. An RMD calculated based on a December 31, 2019 value could lead to a disproportionate RMD relative to today’s account values, forcing a disproportionately large taxable distribution.
Please note the RMD waiver is already in place for applicable MidAmerica retirement plans.
The legislation further permits retirement plans to adopt these rules immediately, provided the plan is amended before the last day of the first plan year that begins on or after January 1, 2022, or later if prescribed by the Treasury Secretary.
Our approach to completing plan amendments has been outlined below:
- If your organization’s retirement plan already offers loan provisions, MidAmerica will amend your plan with a CARES Act provision to allow for the new expanded offerings.
- All of our 401(a), 403(b) and 457(b) retirement plans will be amended with a CARES Act provision to allow for the expanded hardship distribution offerings.
As MidAmerica continues to monitor COVID-19’s impact on our health & welfare plans, we are committed to providing updates to our partners, employers and participants. If you have any questions on the CARES Act, your benefits with MidAmerica, or need additional support during this time, we’re here to help. Our hours of operation have not been impacted and we are available via the contact information listed below.
Service Center Hours of Operation
8:30 a.m. – 8:00 p.m. ET Monday through Thursday
8:30 a.m. – 6:00 p.m. ET Friday
Contact Information by Plan Type
Special Pay Plan
3121 FICA Alternative (Premier Plan)
Employers and Alliance Partners
Please reach out to your dedicated account representative, account manager or our Account Management team by emailing accountmanagement@myMidAmerica.com.
Do you also have a health & welfare benefit, such as a Health Reimbursement Arrangement or Flexible Spending Account?
To read more on how those benefits are affected by the recent CARES Act, click here.