Will Your Retirement Plan Adopt CARES Act Provisions?
By the end of May, more than 38 million Americans had filed for unemployment. The sheer volume of new applicants has overwhelmed state unemployment systems, delaying benefit payments. As a result, many households are experiencing serious financial difficulties.
While state unemployment systems work through their backlogs, households that have exhausted non-retirement savings and are facing cash shortages may have no option other than taking distributions from retirement plans. Their immediate financial need will trump their long-term retirement goals.
CARES Act provisions may offer short-term financial support.
The CARES Act gives plan sponsors the opportunity to adopt provisions that provide eligible plan participants with greater access to retirement savings. The legislation created coronavirus-related distributions (CRDs), increased plan loan limits and eased plan loan repayment rules.
While these measures are well-intended – and may be critical to the short-term financial health of some families – they also could deepen the retirement crisis in the United States.
Plan sponsors know that even when no penalty tax is assessed, any distribution from a plan means less money is invested and compounding for retirement, which can hurt retirement outcomes.
Plan loans are not ideal for plans either. Plan participants use after-tax dollars to make loan principal and interest payments back into their plan account, and then, when distributions are taken in retirement, plan participants pay income taxes on the money again.
In addition, many borrowers default on plan loans. If a plan loan is not repaid, the participant may owe ordinary income taxes and early withdrawal penalties on the amounts, which can deepen financial difficulties.
In an effort to improve retirement outcomes, the government, plan sponsors, plan providers and plan advisors have delivered a key message in unison for decades: Retirement savings should be spent during retirement and not before. Early distributions should be taken as a last resort.
Plan sponsors should document their processes and decisions.
Now, plan sponsors have tough decisions to make. Should they offer all, some or none of the CARES Act provisions?
Each plan sponsor’s choice will depend on plan-specific considerations. The goal for many will be to provide short-term relief to those in need, while encouraging financially sound participants to stay focused on long-term retirement goals.
When it’s time to communicate a decision, think carefully about how to communicate CARES Act options.
Many plan providers have CARES Act checklists available. Often, the first step is meeting with administrators, recordkeepers and/or ERISA attorneys to discuss current participant needs, review CARES Act provisions, decide which provisions (if any) to adopt and document the reasoning behind your decisions.
Recently published IRS guidance may help, too. In addition, the Treasury Department and IRS anticipate that additional guidance on the CARES Act will apply the principles of Notice 2005-92 to the extent the provisions of section 2202 of the CARES Act are similar to the provisions of Katrina Emergency Tax Relief Act (KETRA) of 2005, addressed in that notice. Additional guidance from the Treasury Department and the IRS is anticipated.
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The material in this blog is presented for generational informational purposes only. The information presented is not investment, legal, tax or compliance advice. Millennium Trust Company performs the duties of a directed custodian, and as such does not offer or sell investments or provide investment, legal or tax advice.