CARES Act Considerations for Retirement Plans

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides certain temporary relief for eligible retirement plans, giving employers important options to consider as the nation recovers from the COVID-19 pandemic. Plan sponsors are not required to adopt these provisions but may elect to do so to assist employees suffering financial hardship due to the pandemic.

Qualified Individuals

Multiple retirement plan provisions in the CARES Act are only applicable to individuals who have been affected by the coronavirus pandemic (qualified individuals).

A qualified individual is a plan participant:

  • Who has been diagnosed with the coronavirus by a CDC-approved test, or whose spouse or dependent has been diagnosed with the coronavirus by a CDC-approved test;
  • Who has experienced adverse financial consequences because of being quarantined, furloughed, laid off, or has had work hours reduced due to the coronavirus;
  • Who is unable to work because of a lack of childcare due to coronavirus;
  • Who owns or operates a business and has had to close or reduce hours due to the coronavirus; or
  • Who has experienced an adverse financial consequence due to other factors as provided in guidance issued by the IRS.

Plan administrators may rely on a participant’s certification to satisfy the criteria for eligibility as a qualified individual.


A qualified individual participating in an employer-sponsored eligible retirement plan is permitted to take coronavirus related distributions (CRDs) up to $100,000 during 2020. Eligible retirement plans include individual retirement accounts (IRAs), qualified pension plans, 401(k) plans, qualified 403(a) annuity plans, 403(b) annuity contracts and custodial accounts, and 457 deferred compensation plans.

10% Penalty and 20% Withholding Waived

The CARES Act waives the 10% early withdrawal tax penalty that generally applies to plan participants younger than 59½ for CRDs made on or after January 1, 2020 and before December 31, 2020. Additionally, CRDs will be exempt from the 20% mandatory federal withholding requirement.

Repayment/Recontribution and Tax on Distributions

At the participant’s election, a CRD will either: (1) not be taxable to the qualified individual, subject to the individual repaying the amount to an eligible retirement plan any time within the 3-year period immediately following the distribution in one or more payments; or (2) taxed ratably over a 3-year period, if the distribution is not repaid.

Repayments can be made on a pre-tax basis and can be made to the retirement plan that made the coronavirus distributions or another tax-qualified retirement plan in which the individual participates or is a beneficiary. In other words, the repayment will be treated as an eligible transfer or rollover to such plan (recontribution). Further, the recontributed amounts will not count toward the maximum contribution limit in the year that the funds are recontributed to an eligible retirement account.

Amounts not repaid will be included in the individual’s taxable income and, unless otherwise elected by the individual, taxation will be spread out ratably over a 3-year period beginning with the taxable year in which the distribution is taken. For example, if a qualified individual takes a $15,000 coronavirus distribution, the individual can report and pay taxes on $5,000 of income in 2020, 2021, and 2022, instead of reporting the entire $15,000 as taxable income for 2020.

Although the CARES Act allows participants an option to repay the distribution back as a recontribution to an eligible plan without a taxable event, or not repay the distribution back and pay taxes on it, additional guidance from the IRS is needed to determine how this option is to be carried out, administered, and reported.


Loans under an eligible retirement plan typically cannot exceed the lesser of $50,000 or 50% of the participant’s vested account balance. The CARES Act temporarily allows for increased plan loan limits up to 100 percent of the vested account balance, capped at $100,000. (Loans are generally not permitted from IRAs or IRA-based plans.) A qualifying loan applies to loans taken out within 180 days after the enactment of the CARES Act.

For qualifying individuals who take a loan from an eligible retirement plan on or after March 27, 2020, any repayment of the loan due between March 27, 2020 and December 31, 2020 may be delayed for one year, with any subsequent repayments and interest adjusted to reflect such delay in repayment.

Required Minimum Distributions

All required minimum distributions for 2020 have been waived for IRAs, 401(k) plans, 403(b) plans, 457(b) plans, or other defined contribution plans.

Delay of Minimum Required Contributions to Pension Plans

The CARES Act relaxes the minimum required contributions for plan sponsors of a qualified single employer defined benefit pension plan by extending the due date for all contributions (including quarterly contributions) to such plans until January 1, 2021. However, the delayed payment must include interest from the original due date of the minimum required contribution.

The CARES Act also allows a defined benefit plan to use the adjusted funding target attainment percentage for 2019 to determine whether the benefit limitations under section 436 of the Internal Revenue Code apply (i.e., benefits limitation imposed due to underfunded status of the plan). In other words, this provision allows plan sponsors to minimize IRC § 436 restrictions on future benefit accruals and lump sum distributions that may result from a market decline linked to the coronavirus.

Plan Amendments

The CARES Act permits retirement plans to adopt the above provisions immediately, even if the plan does not currently allow for hardship distributions or loans, so long as the plan is amended on or before the last day of the first plan year beginning on or after January 1, 2022.

Employers should continue to maintain ongoing communications with their plan investment advisors, third-party administrators, and record-keepers, as emergency updates from the federal government may affect plan changes.

DOL Has Authority to Delay Certain ERISA Filings

The CARES Act also authorizes the Department of Labor to postpone certain ERISA filing deadlines for retirement and group health plans, up to one year, as a result of the public health emergency. Church plans are generally not subject to ERISA, including its rules relating to funding, vesting, reporting and disclosure, and fiduciary responsibility.

The IRS is expected to provide guidance regarding the retirement-related provisions above, which will be available on the IRS website. We will continue to update these topics as continued legislation and guidance are issued.

409A Nonqualified Deferred Compensation Plan Considerations

While the CARES Act addresses eligible employer-sponsored retirement plans as discussed above, it does not address § 409A nonqualified deferred compensation plans. However, there may still be relief available under the current provisions of § 409A.

What qualifies as a separation from service triggering distribution under 409A?

Permanent layoffs will constitute a separation from service triggering a distribution event under a 409A plan. Under certain circumstances, furloughing employees may also constitute a separation from service. If the furlough does not exceed six months or will exceed six months but the employee has either a contractual or statutory right to re-employment, the furlough qualifies as a bona fide leave of absence under § 409A and is not a separation from service.

A substantial reduction in hours may also create a separation from service, which would trigger a distribution event. If an employee’s hours decrease to no more than 20 percent of the average hours over the immediately preceding 36-month period, the employee may be deemed to have separated from service.

Can employees participating in a 409A plan receive a distribution to assist them during financial hardship?

Accelerated distributions are generally not permitted under a 409A plan. However, a 409A plan may allow an employee to request a distribution for unforeseeable emergencies. An unforeseeable emergency is defined as an extraordinary and unforeseeable circumstance beyond the control of the employee that causes the employee severe financial hardship. Examples include:

  • Severe illness or injury to an employee or the employee’s spouse, beneficiary, or dependent
  • Imminent foreclosure or eviction of the employee’s primary residence
  • Medical expenses, including nonrefundable deductibles, or prescription drug medications
  • Other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the employee which cannot be relieved through the employee’s other resources

The threshold for establishing an unforeseeable emergency is high, but the severe financial hardship caused by the coronavirus pandemic may be a circumstance which establishes such unforeseeable emergency.

We will continue to provide updates as regulations and guidance are issued. For more resources for nonprofits and churches related to the coronavirus pandemic, visit our COVID-19 resources page. If you have specific questions, please contact us.


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