CARES Act Expands Retirement Plan Options | Saturna Capital

The Coronavirus Aid, Relief, and Economic Security (CARES) Act contains several provisions that affect the operations of 401(k) plans, especially at the employee level.

  1. New type of distribution.  The act allows plan participants to withdraw up to $100,000 from their 401(k) accounts until December 31, 2020, whether they have reached retirement age or not, for coronavirus-related reasons. 
    • This is retroactively effective to January 1, 2020, meaning that anyone who has already taken a pandemic-related distribution this year can claim it as such.
    • Employers can rely on an employee’s written certification that the withdrawal is pandemic-related – no further burden of proof is required.
      • Pandemic-related reasons include:
        • Diagnosis of COVID-19 via a CDC-approved test (for the plan participant, their spouse, or dependent).
        • Adverse financial consequences as a result of layoff, furlough, reduced work hours, lack of available childcare, closing or reduced hours of owned business, and other factors as determined by the Treasury Secretary.
    • The 10% early withdrawal penalty is waived for these distributions, as is the standard 20% withholding at the time of the distribution.
    • The distribution will still count as taxable income, but the tax burden can be spread out over the next three years to lessen the impact.  For example, a $75,000 distribution can be broken out so that only $25,000 must be reported for 2020 taxes, $25,000 for 2021 taxes, and $25,000 for 2022 taxes.
    • Those who take withdrawals may also repay them within three years of the date of withdrawal, either partially or in full, in the form of rollovers to reduce the tax burden.
    • Employers do not need to track any of this, beyond ensuring the withdrawals do not exceed $100,000 per employee for pandemic-related reasons.
  2. Expanded availability of loans from the plan.
    • The maximum loan amount is now $100,000 or 100% of vested balance, whichever is less.
    • Any loan payments due between 3/27/2020 and 12/31/2020 for new and preexisting loans can be suspended without penalty for up to one year, but interest will continue to accrue.
  3. Required Minimum Distributions (RMD) waived for 2020.
    • Anyone who has already taken an RMD for 2020 may choose to roll it back into the plan.

The new provisions are optional, meaning plan sponsors must choose whether or not to allow them in their plans.  If a plan sponsor does choose to allow these expanded provisions, the plan document must be amended no later than December 31, 2022.  The new provisions can be enacted immediately with the formal documentation to follow. 

If you would like to amend your plan to allow these new distribution and loan features, please contact Saturna’s retirement plans team at 401k@saturna.com or (360) 650-6963.