The recently enacted Coronavirus Aid, Relief, and Economic Security (“CARES”) Act provides schools the option to include new opportunities for employees to access their 403(b) and/or 457 tax qualified retirement plans to help defray costs and otherwise provide financial support related to the coronavirus pandemic. As discussed in more detail below, under the CARES Act, these retirement plans can be amended to allow: (1) qualifying employees the ability to take a penalty-free and tax-deferred distributions of up to $100,000 from their 403(b) and/or 457 retirement accounts, (2) qualifying employees greater opportunity to take tax-free loans from their retirement accounts, and (3) certain retired employees to forgo taking their required minimum distribution (“RMD”) during 2020. To be clear, these new features are optional. School units are not required to offer them under their 403(b) or 457 retirement plans. However many employers sponsoring 403(b) and 457 retirement plans may wish to extend these potential benefits to employees. Schools wishing to offer one or more of these new features, must amend their 403(b) and/or 457 retirement plans to incorporate these changes.
Additional important details with respect to each new retirement plan feature are set forth below:
- Coronavirus-Related Distribution of up to $100,000: During 2020, an employee that is a “qualified individual” may take coronavirus-related distribution(s) of up to $100,000 from his/her 403(b) and/or 457 account. A “qualified individual” is any school employee that has either: (a) been diagnosed with, or has a spouse or dependent diagnosed with, COVID 19 or (b) who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, or other factors as determined by the IRS. The school district can rely on a certification from the employee with respect to the existence of qualified adverse financial circumstances. Also, the coronavirus distribution can be taken as a tax-deferred distribution, where the distribution is received in full in 2020 but is taxed ratably over a 3-year period beginning in 2020. The employee also has the option to pay back the distribution over this 3 year period and avoid incurring any tax on the distribution altogether.
- Expanded Access to Loans: Not all school 403(b) and/or 457 plans offer a loan feature. For those plans that do include a loan feature, or for those plans that are amended to include one, a “qualified individual” (as defined above) may now apply for a loan of up to $100,000 of his or her 403(b) and/or 457 plan account balance anytime during the 180 period beginning March 27, 2020. In addition, qualified individuals with current loan balances outstanding can delay for 1 year repayments otherwise due from March 27, 2020 – December 31, 2020.
- Suspension of RMD: The plan could be amended to not require RMD’s for 2020. This is potentially beneficial to those former employees at least 72 years of age who do not want to take RMDs from their accounts in 2020 when the market is down or for any other reason.
School units wishing to incorporate any combination of these new features may do so immediately and generally have until 2024 to amend their plan documents to reflect the changes. However, it is recommended that school units adopting these changes amend their plans immediately to avoid potential oversight and potential plan disqualification. In addition, for school units that offer hardship distributions under their retirement plans and have not yet made the
mandatory
amendments to hardship distributions generally required by March 31, 2020
(discussed here)
, any CARES act amendments could be made in conjunction with the mandatory hardship amendments.
We will continue to monitor and inform school units of new laws and other developments as they become available.
