Signed into effect on March 27, the Coronavirus Aid, Relief and Economic Security (CARES) Act is a robust economic stimulus package designed to help small business owners and hardworking American families during these unprecedented times.
For small businesses, the new regulation allows access to capital to help maintain operations. For employees, it grants new ways that they can use their retirement plan savings for emergency financial relief. Additionally, for qualifying individuals, there are other features available that strive to alleviate financial anxiety around tax filing deadlines, HSA payments, student loans, and the new $1200 recovery rebate checks.
This article will focus on the information that plan sponsors should know about retirement plan changes and what questions to anticipate from employees.
Before we dive into these three changes, let’s start with eligibility. The new CARES Act is specific to individuals affected by coronavirus. For plan participants to qualify, that individual needs to claim they meet these requirements:
– An individual who:
– Additionally, they need to take the distribution before 12/31/20.
While that definition does appear to cover all workers, it’s important to let your employees know which of the qualifying exemptions they might claim in the future. Two valuable things to note:
Now that your participants are eligible to qualify for Coronavirus-related changes. Here are some of the major updates impacting retirement plans.
If your plan allows for loans, then participants may take a plan loan for the lesser of $100,000 or 100% of the vested account balance.
Alex has $200,000 vested in their retirement account
They can take a plan loan of $100,000
Alex is eligible for a $100,000 plan loan
Jordan has $50,000 vested in their retirement account
They can take a plan of 100%
Jordan is eligible for a $50,000 plan loan
If your plan does not allow loans. You can amend your plan to allow for the new option(s). However, plans do not have to offer the expanded Coronavirus-related distribution or loan options. This is a fiduciary decision and should be considered thoughtfully.
If any participants have existing plan loans and for qualifying employees, their scheduled repayments and any accrued interest can be delay for the remainder of the year (12/31/20). As a best practice, direct your employee to contact the plan’s administrator for their specific loan repayment details.
The CARES Act created a new type of withdrawal from retirement plans. It is separate and unique from traditional Hardship Withdrawals. The differences are:
One reminder, while these times are difficult for everyone, as the plan sponsor, you have the ability to decide if your plan will offer the Coronavirus-related distribution withdrawal. This will mean amending your plan for these new options. While you can start utilizing any of these provisions immediately, it is best to setup a call with your third party administrator to discuss the details.
In addition to the new ways to access retirement plan accounts, many employees are going to have questions about rebate checks and other CARES Act changes.
For employees that earn under $75,000 per year, they should receive a $1,200 stimulus check. For employees earning up to $99,000, they will receive a reduced stimulus check. The payments are reduced by $5 for every $100 in income above $75,000. Additionally, for employees with children, each child may add another $500 to the stimulus check. The stimulus checks are anticipated to arrive in April.
Yes, if the employee has federal student loans, they can pause payment for the next six months (through September 30, 2020) and during this time interest is waived.
Also, as an employer, under the new CARES Act, you may contribute up to $5,250 annually toward your employee’s student loans, and that amount would be excluded from the employee’s income.
The CARES Act has increased access to telehealth networks and expands the list of qualifying expenses. It best to contact your HSA provider for specifics.
If you are a small business owner with under 500 employees that has been financially impacted by COVID-19 and meet the application requirements, then you could apply for a federally backed loan. For more information, click here: https://covid19relief.sba.gov/#/
While these seem like a lot of changes, the CARES Act cuts the red tape and provides an avenue to those most impacted by coronavirus the ability to access their financial accounts.
As an employer, right now we understand it can be an incredibly stressful time. That is why we are here to keep you informed and updated on how new regulation may impact your company’s retirement plan and your employees. This knowledge is another way that you can educate your employees to make smart financial decisions and help you continue offering this incredibly value company benefit.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements and you should consult your attorney or tax advisor for guidance on your specific situation.
Jerome Pfeffer, CRC, AIF
INVESTMENT SOLUTIONS GROUP
6020 Academy NE, Suite 206
Albuquerque, NM 87109
(505) 888-4015 Direct
(505) 515-0036 Fax
Securities and Advisory Services Offered Through LPL Financial. A Registered Investment Adviser.
Member FINRA / SIPC.