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The Coronavirus Aid Relief and Economic Security (CARES) Act

This past Friday, the Coronavirus Aid Relief and Economic Security Act (CARES Act) was signed into law by the president.  Below, we review the provisions of the Act that apply to retirement plans, followed by several non-retirement plan provisions.


Plan Distributions:  The Act relaxes the rules on plan distributions by permitting COVID-19 related distributions made between January 1, 2020 and December 31, 2020 by waiving the 10% penalty tax for a distribution taken prior to attainment of age 59 ½ on withdrawals up to $100,000 from a retirement plan or IRA for an individual:

  • who is diagnosed with COVID-19;
  • whose spouse or dependent is diagnosed with COVID-19;
  • who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; 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 same three-year period, thus avoiding taxation.

Required Minimum Distributions - RMDs:  The bill suspends for 2020 the minimum required distributions most individuals must take from tax-deferred 401(k)s, 403(b)s, individual retirement accounts and governmental 457(b) plans.  Under current law, Five percent owners and terminated Non-Highly Compensated Employees must begin taking RMDs from their Defined Contribution  plans at age 72. Generally, all individuals are required to start taking RMDs from their IRAs at age 72.

Plan Loans:  Plan Loans made during the 180-day period that begins on the date of enactment will have a maximum limit of $100,000 or 100% of the participant’s vested account balance in the plan. Participants with an outstanding plan loan with a repayment due from the date of enactment of the Act through Dec. 31, 2020 can delay their loan repayment(s) for up to one year. Any subsequent repayments with respect to any such loan shall be adjusted to reflect the delay in the due date and any interest accruing during such delay. (NOTE: Coronavirus-related loans are no longer available as of September 23, 2020. The options for requesting a loan from a retirement plan can be found within the Plan’s loan policy or Summary Plan Description.)

To be eligible for the loan limits and payment suspension, a person must meet the same coronavirus-related tests listed for coronavirus-related distributions.

Single-employer DB Plan Funding Relief:  Employers with single-employer defined benefit plans are given additional time to meet their funding obligations.  The due date for any contribution otherwise due during 2020 will be January, 1, 2021. At that time, contributions due earlier would be due with interest. The provision also provides that a plan’s status for benefit restrictions as of December 31, 2019 can apply throughout 2020.

The legislation permits retirement plans to adopt these rules immediately, even if the plan does not currently allow for hardship distributions or loans, provided the plan is amended on or before the last day of the first plan year beginning on or after January 1, 2022 for non-governmental plans, or later if prescribed by the Treasury Secretary.


Employer Payment of Student loans:   Employer student loan payments up to $5,250 during a calendar year, to either an employee or the lender, are not taxable to the employee. 

Student Loan Payments Suspended:  Payments of direct student loans and Federal Family Education loans that are currently owned by the Department of Education are suspended through September 30, 2020 with no accrual of interest.  Any involuntary collection such as garnishment or reduction of a tax refund during this time is also suspended.

Recovery Rebate Direct Checks:  Most Americans with income below $75,000 will receive a check for $1,200 ($2,400 for joint filers).  This dollar amount will be phased out for income between $75,000 and $95,000 for single filers and for joint filers with income over $150,000. There will be an additional $500 for each qualifying child.

Extended Unemployment Insurance Program:  Allows for four months of "full pay," rather than the usual three months for most. It will also raise the maximum unemployment insurance benefit by $600 per week. It will apply to traditional workers for small and large businesses as well as those who are self-employed and workers in the gig economy.

Loans to Small Businesses: $350 billion in the form of loans for small businesses impacted by the pandemic; some of those loans could be forgiven.

Inclusion of OTC medicines and drugs in FSAs: Allows for a participant enrolled in an Flexible Spending Account (FSA) or Health Savings Account (HSA) to incur expenses on over-the-counter (OTC) medicines and drugs.  With this change, which reversed a change made previously by the Affordable Care Act, OTC drugs and medicines will no longer require participants to have a prescription to prove eligibility. In addition to the reinstatement of OTC medicines and drugs, the bill expands the eligible OTC definition to include menstrual care products.  This provision has been added permanently and applies to expenses incurred on or after January 1, 2020. 

There are also many other provisions aimed at helping employers and making it easier for health care to be obtained.

UPDATES AS OF 7/1/2020

IRS Notice 2020-51 provides new guidance related to the waiver of 2020 RMDs and the ability to return funds to a qualified plan or IRA under the 60-day rollover rules. The Notice applies to distributions from a qualified plan or IRA that would have been RMDs if the CARES Act had not waived the requirement for 2020 RMDs. The highlights of the Notice are as follows.

The 60-day rollover deadline for returning 2020 distributions to an eligible plan or IRA has been extended to August 31, 2020, meaning that distributions made in January can be returned by August 31.

Repayments of previously distributed RMDs from an inherited IRA may also now be returned to the same IRA by the August 31 deadline. This Notice does not extend this relief to amounts paid to non-spouse beneficiaries from eligible plans.

Multiple distributions made from IRAs that are returned to the same IRA by the deadline will not be subject to the one rollover per 12 months rule. Note that the one rollover rule does not apply to repayment of coronavirus-related withdrawals.

On June 19th, the Internal Revenue Service released Notice 2020-50 to help retirement plan participants affected by the COVID-19 coronavirus take advantage of the CARES Act provisions providing enhanced access to plan distributions and plan loans. The Notice expands the factors that qualify an individual as experiencing adverse financial consequences by clarifying that those factors include adverse financial consequences arising from the effects of the coronavirus on the individual’s spouse or household member (i.e., a person who shares the individual’s principal residence), as well as reductions in pay, rescissions of job offers and delayed start dates. 

As expanded under Notice 2020-50, a qualified individual is anyone who –

  • is diagnosed, or whose spouse or dependent is diagnosed, with the virus SARS-CoV-2 or the coronavirus disease 2019 (collectively, "COVID-19") by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or 
  • experiences adverse financial consequences as a result of the individual, the individual's spouse, or a member of the individual's household (that is, someone who shares the individual's principal residence):
    • being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19;
    • being unable to work due to lack of childcare due to COVID-19;
    • closing or reducing hours of a business that they own or operate due to COVID-19;
    • having pay or self-employment income reduced due to COVID-19; or
    • having a job offer rescinded or start date for a job delayed due to COVID-19.

Notice 2020-50 includes guidance on recontributing COVID-19 distributions.  The CARES Act stated that CRDs may be repaid within three years of the distribution and treated as rollover contributions. Rollovers may only be made into a plan that accepts rollovers, or into an IRA. The Notice clarifies that any CRD paid to a qualified individual as a beneficiary of an employee or IRA owner (excluding surviving spouses) cannot be recontributed to a retirement plan. 

The Notice also includes a clarification regarding administering participant loan payments that were stopped due to the COVID-19.  The CARES Act allows plans to delay, for up to one year, retirement plan loan repayments that are due for qualified individuals on or after March 27, 2020, and before January 1, 2021. The Notice addresses industry confusion about how to implement loan delay repayments by offering a safe harbor method to comply. The safe harbor and example of an additional reasonable method of compliance in the Notice both indicate that the regularly scheduled loan repayments should begin in January 2021.

Sentinel will apply the principles of the safe harbor method discussed in the Notice. Each loan repayment that was due from March 27, 2020, through December 31, 2020 will be reamortized in January 2021. Interest accrued from the date of the loan suspension (for loans suspended after March 27) will be included in the reamortization. Additionally, the loan term will be extended for the number of payments during the deferment period. The new payment obligation will be effective from January 2021 until the loan is paid off. However, if a participant begins to repay its loan prior to January of 2021, Sentinel will reamortize the loan at that the time payments begin.

For more news and information regarding COVID-19, please see our COVID-19 Resources page.

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