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“CARES” Act and Defined Benefit Plans

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security (or “CARES”) Act.  As described in our previous article, the CARES Act gives sponsors of defined contribution plans some new tools to help cash-strapped employees. Sponsors of defined benefit plans also received help from the CARES Act, the previously passed SECURE Act, and the IRS.  The IRS recently issued guidance that extends the deadline for employers to adopt a pre-approved defined benefit plan.  Defined benefit plan sponsors also should remember their option (under the SECURE Act) to decrease the age at which employees may request an in-service withdrawal.

Minimum Required Contributions Delayed

The CARES Act allows defined benefit plan sponsors to delay making minimum required contributions to meet funding standards for the 2020 calendar year until January 1, 2021.  Employers taking advantage of this relief must pay interest on the delayed contributions for the period from when the contributions were originally due to when the contributions are paid.  The interest owed is calculated at the plan’s effective interest rate for the plan year which includes the payment date.

Benefit Restrictions Relief

The Tax Code requires that defined benefit plans meet certain funding thresholds to pay accelerated distribution options, such as lump sums.  When a plan’s funding status falls below 80 percent, restrictions are imposed on such distribution options.  Because the challenges presented by COVID-19 could impact a plan’s funded status, the CARES Act allows employers to choose to use the plan’s funding status for the plan year ending in 2019 for determining whether benefit restrictions must be imposed for the 2020 plan year.

Pre-Approved Defined Benefit Plans

In addition to the defined benefit plan relief afforded under the CARES Act, the IRS issued guidance regarding certain pre-approved defined benefit plan deadlines.  The deadline for employers to adopt a pre-approved defined benefit plan is extended to July 31, 2020, (previously the deadline was April 30, 2020).  The end of the second six-year remedial amendment period for such plans is also extended to July 31, 2020.  Thus, the third six-year remedial amendment cycle for pre-approved defined benefit plans will begin on August 1, 2020, but the cycle end remains January 31, 2025.

In-Service Withdrawals

As described in our prior article about the SECURE Act, defined benefit plans may offer in-service withdrawals to participants at age 59 ½.  Employers may consider adding this option (or modifying an existing option) if they are looking for ways to assist defined benefit plan participants in light of the COVID-19 pandemic.

Required Minimum Distributions

For reasons that are not clear, the CARES Act provides a waiver for required minimum distributions that otherwise are due in 2020, but only for defined contribution plans (including Code Section 401(a) plans, Code Section 403(a) and 403(b) plans, and governmental Code Section 457(b) plans).  The waiver does not apply to defined benefit plans.  Thus, the RMD rules implemented under the SECURE Act continue to apply.

If you have any questions about any of these options (or requirements), please contact anyone in Spencer Fane’s Employee Benefits Practice Group.

This blog post was drafted by Beth Miller, an attorney in the Spencer Fane LLP Overland Park, KS office. For more information, visit spencerfane.com.