The Impact of the CARES Act on Retirement Planning

The Coronavirus Aid, Relief, and Economic Security (CARES) Act and other COVID-19-related laws were passed in late March 2020. Not only were $2 trillion of economic stimulus dollars made available to private citizens and small businesses, but some temporary rules were implemented for retirement plans which, for a time, will have an impact on how these plans are administered. In this post, we will give an overview of the changes stemming from these new rules.

The CARES Act allows plan participants who have been affected by the pandemic to temporarily dip into their saving when ordinarily they are restricted from doing so until they are 59-and-a-half years old. For Plan Sponsors, each must decide whether to adopt the new loan or distribution provisions based on the specific situation they find themselves in and the needs of their workforce. Because of this option, each sponsor should consider several factors in addition to the short-term financial needs of their employees. For example, are participants likely to default on loans in the future? Will defaulted loans result in tax penalties? Will the defaulted loans destroy retirement savings?


The CARES Act also brought along new distribution and loan provisions which are separate from existing programs. Plans may opt to allow participants to take a distribution up to $100,000, a new loan of $100,000, or both. However, Plan Sponsors must choose which programs they want to implement and then work with providers such as recordkeepers and TPAs to decide how to enact the provisions.

Overall, Plan Sponsors have been generally more open to adopting emergency distribution provisions rather than loan limits (45.4% vs. 32.2%). Let's look at the numbers:

· Nearly 70% of large organizations and 20.7% of small organizations are allowing distributions of up to 100% of the vested account or $100,000.

· Nearly half of businesses (46.7%) have embraced the option to allow repayment of COVID-19-related distributions within three years. Of these, over a third are large organizations (68.1%).

· More than 60% of large organizations are suspending loan payments on or before December 31, 2020. Only 20.7% of small organizations are taking this course of action.

· 9.2% of organizations are not planning to adopt any of the new provisions.


Hattie Greenan, the Director of Research at Plan Sponsor Council of America (PSCA) says, "Employers are being forced to make difficult decisions between business needs and what is in the long-term best interest of their participants. They want to provide immediate relief to employees directly impacted by COVID-19, but also thoughtfully considering the impact on their employees' long-term financial stability and ability to retire."

Getting caught between two such extremes and meeting both objectives may seem an impossible task, but with the right advice and guidance, Plan Sponsors can navigate this tricky situation.


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