CARES Q&A

Since the Coronavirus, Aid, Relief and Economic (CARES) Act was passed on March 27, 2020, we have received numerous questions in regards to the impact on retirement plans. We have addressed some of the most common questions below. If you have further questions, please reach out to your Sentinel Service Team for more information.

Coronavirus-Related Distributions

May plan participants impacted by COVID-19 access their retirement funds?

Yes, certain participants may withdraw, penalty free, up to $100,000 between January 1, 2020 and December 31, 2020.

Who is eligible for these withdrawals?

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, or suffered adverse financial consequences due to COVID-19 (furlough, reduction in hours, unable to work due to childcare, loss of business, etc.).

Does a participant who receives a COVID-19 distribution need to pay all of the taxes in the 2020 tax year?

No, the participant may either pay all of the tax applicable to the 2020 taxable year or spread it out evenly (33.33% per year) over 3 years.

Will Sentinel issue only one 1099R for a COVID-19 distribution?

Yes. It is the participant's responsibility to spread the tax on their individual taxes. The participant’s election does not impact the plan’s reporting on Form 1099-R.

Can a participant who receives a COVID-19 distribution repay the amount into a qualified retirement plan?

Yes, the participant has three years from the day after the distribution was received to repay the amount into a qualified retirement plan (or any other plan or IRA that can accept rollovers). The distribution will be taxable if it is not repaid, but it can be repaid over a three-year period, unless otherwise elected.

May a terminated participant take a COVID withdrawal?

A terminated participant may take a COVID distribution, but may not take a loan.

Does the plan sponsor need to verify whether an individual qualifies for a COVID-19 withdrawal or loan?

No, the plan sponsor may rely on a participant’s certification for eligibility, unless the plan sponsor has actual knowledge to the contrary.

Does my plan have to permit COVID distributions?

No.

If my plan does not wish to permit COVID distributions and/or loans, what should I do?

Contact your Sentinel Plan Consultant to request to opt-out of the special COVID withdrawals.

Retirement Plan Loan Changes

Have participant loan limits been adjusted?

Yes, the loan limit can be increased to the lesser of $100,000 or 100% of the participant’s vested account balance. This only applies to loans made on or before September 23, 2020 (180 days following enactment of CARES) and is only for individuals that meet the same conditions outlined for the withdrawals noted above.

What about outstanding loans?

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. This includes a loan that was taken out prior to the CARES Act, even if it the loan was originally taken for a non-COVID reason (the payment must be missed for a COVID reason).

If my plan doesn’t currently allow loans or if it limits loans to a defined number of participant loans outstanding, will Sentinel permit a special COVID-19 loan?

No. Please contact your Plan Consultant if you would like to add COVID loans or increase the number of participant loans permitted.

Does my plan have to make these loan changes?

No.

If my plan does not wish to implement loan changes, what should I do?

Contact your Sentinel Plan Consultant to request to opt-out of the special COVID withdrawals.

Required Minimum Distributions

Have there been adjustments made for Required Minimum Distributions (RMDs)?

Yes. 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 was taken from January 1, 2020 through January 31, 2020, a participant had the opportunity to roll it over and defer paying taxes for a 60 day period from the date the RMD was taken, including rolling the RMD back into the plan. However, at this point, there is has been no further relief published by the IRS that would permit RMDs taken during January to be rolled over.

IRS Notice 2020-23 has indirectly provided temporary relief to the 60 day rollover rule for RMDs taken on or after February 1, 2020. Because the IRS has issued a general extension until July 15, 2020 for tax deadlines occurring on or after April 1, 2020, the 60 day rollover period has been extended to July 15, 2020.

While there is an expectation that the IRS will extend the 60-day rollover period for all RMDs taken, as of late-April, this extension has not occurred.

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 (in accordance with the above rules regarding the 60 day rollover period).
And the distribution was actually taken in 2019, no relief is available.

How are RMD usually administered and why has this rule been changed for 2020?

An RMD is calculated using the balance of an individual retirement account on December 31st 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.

General Questions

When do I need to amend my plan for the changes to withdrawals, loans, and RMDs?

While you can start utilizing any of these provisions immediately, the plan must be formally amended for those new options generally no later than the last day of the first plan year beginning on or after January 1, 2022. For most plans, Sentinel has implemented the special rules and will amend your plan document by way of a standard amendment, which is expected later this year.

Is there any relief for defined benefit plans?

Yes. For defined benefit and money purchase pension plans, the law includes a delay in contribution deadlines. Specifically, any contribution due in calendar year 2020 (including quarterly contributions) now has a delayed due date of January 1, 2021. Note that the employer must pay interest on delayed contributions, from the original due date to payment date, using the effective rate of interest for the plan for the plan year that includes the payment date.

Is all FFCRA compensation (i.e., special FMLA or sick leave) paid to an employee eligible comp for plan purposes?

Yes. In general, the employer should follow its standard practices involving the definition of compensation.

If we contribute our match or profit share on an annual basis, can we suspend?

If your employer contribution is discretionary, you may suspend it at any time. If it is a fixed formula in the plan document, you must first amend the plan document. For safe-harbor plans, you must amend the document and provide 30 days advanced notice prior to suspending the match. While the safe harbor notification is required, even if your plan is not a safe harbor plan, it is a best practice to document your decision and let employees know that you have suspended any contribution, especially if it involves a match.

Will there be any relief in terms of plan/participant notices?

The CARES Act provides the Department of Labor with broad authority to extend the deadlines notices. Stay tuned for more information.

COVID-19 Resources