31 March 2020

NOT SO FAST! Why Trying to Solve the COVID-19 Crisis may Exacerbate the Future Retirement Crisis

***Information and guidance in client updates was up to date at time of publication. During the pandemic, information and guidance has been changing rapidly. If you have any questions about the information contained in a client update, please contact the author(s) or your Miller Johnson attorney.***

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which became law on March 27, 2020, added several mandatory and optional provisions impacting employer-sponsored retirement plans in an attempt to ease the financial pain of the COVID-19 pandemic.  Many recordkeepers are racing to implement the optional provisions at lightning speed.  As Lee Corso would say to one of his co-hosts during College Game Day (for you deprived sports fans), NOT SO FAST! In addition to there being many unanswered questions regarding these new provisions, the last thing most employers should want is for their employees to tap their retirement plan accounts to satisfy a short term cash flow problem.


  • The CARES Act allows distributions of up to $100,000 to be made until December 31, 2020 from most defined contribution retirement plans as a result of COVID-19, even if the participant does not satisfy the usual hardship distribution rules.  The participant must certify that he, his spouse or one of his dependents tested positive for COVID-19 or suffered adverse financial consequences as a result of COVID-19. It is not clear whether distributions may also be made from pension plans (including cash balance plans and money purchase pension plans) and whether employer contributions made to profit sharing plans may be distributed without the participant satisfying additional requirements.
  • A CARES Act distribution as described above, is not subject to mandatory income tax withholding or the 10% penalty tax even if the participant is less than age 59-1/2.  Participants may repay the distribution to the plan within three years without being taxed on it.  If a participant does not repay the distribution, it is treated as regular income spread equally over the three year period from the date of the distribution for Federal income tax purposes (unless the participant elects to include the entire distribution in his or her 2020 taxable income).  Further guidance is needed to determine how the income is reported, how the election regarding the timing of the year of tax is made and how repaid distributions are to be treated by the recipient plan.
  • The Treasury Department will need to issue further guidance addressing these issues.  But, if participants need access to their retirement plan accounts at any time before December 31, 2020 as a result of getting sick or suffering a reduction in their compensation or hours due to the virus, there is an additional way for them to get it whether the plan currently allows hardship distributions, whether they satisfy the normal hardship criteria or whether they continue to be employed or not.


  • In addition, participants may receive loans of up to $100,000 (or 100% of their account balance in the plan, if less) until September 28, 2020 as a result of the coronavirus.   More importantly, all payments due in 2020 on loans currently outstanding from the plan and new loans taken out for the remainder of 2020 may be put on hold for a year, so all payments are pushed off until at least 2021. The five year repayment period is also extended to 6 years, but interest continues to accrue on the loan during the one year grace period on repayment. It is not clear whether plan sponsors are required to delay these loan payments or whether participants must request the delay.
  • Plan amendments do not need to be adopted right away to reflect any of these provisions (amendments can be delayed until 2022), but employers will want to determine if they will allow any of these provisions to be available to their employees and notify the employees of the new rules to the extent the employer makes them available.


Most employers should not be rushing to implement or promote these options (other than possibly the ability to defer repayment of currently outstanding loans) at this time for several reasons:

  • First, unless a participant has invested all or a significant portion of her account in assets the value of which has not dropped significantly as a result of the virus (pretty much only certain fixed income investments), the participant will be selling assets at the worst possible time, whether the participant takes a distribution or a loan.  So participants should attempt to satisfy current cash flow needs out of other assets if at all possible and some of the other provisions of the CARES Act will hopefully provide them with sufficient cash flow for the time being.
  • Second, many economists and financial experts have been warning of a looming retirement crisis in this country that is only going to get worse as a result of the significant losses in the investment markets and the likely reduction in economic growth for some period of time. In addition, the very significant increase in the Federal debt as a result of the CARES Act increases the likelihood of future cuts to Social Security and/or future increases in tax rates.  Consequently, encouraging participants to pull money out of their retirement plan account now will only make their future retirement income deficit worse and these options should be seen as an absolute last resort in most cases.  COVID-19 should serve as an important reminder that employees should establish an emergency fund of at least 3 months income before they begin investing in risky short term assets like stocks.
  • The most beneficial thing about these changes is that they may make participants more comfortable continuing to contribute to their plan for the remainder of 2020, since they will know that if things get worse before the end of the year and they need access to the money in their account, they will be able to get it without penalty. So, participants should be encouraged to continue to contribute to the Plan (even if the employer must suspend its contributions), since the best time to invest in assets like stocks is generally after a significant drop in the market.  This will help participants replace the value they lost as a result of the drop and increase their odds of being able to retire as they originally planned.
  • This is also a good time for participants who can afford to do so to consider a Roth conversion. The taxes due on the conversion will be significantly less as a result of the decline in the value of the participant’s account and the future growth in the assets will be income tax free. This is another example of how participants who plan properly by building a sizable emergency fund may take advantage of periodic downturns in the markets.


  • The CARES Act also waives the minimum required distribution requirements that apply to defined contribution retirement plans (not defined benefit plans) and IRAs for the 2020 plan year. This allows participants to leave funds in their accounts for an additional year to hopefully allow the investment markets to recover before the next distribution must be made.
  • The CARES Act also provides sponsors of defined benefit pension plans some relief from the minimum funding requirements for 2020.
  • The final thing employers should be considering immediately is whether to reduce employer contributions to their retirement plans if necessary.  This is obviously a difficult situation for everyone, but hopefully participants will not make a likely future crisis worse in order to solve the current crisis.


The CARES Act is a significant piece of federal legislation (880 pages) that was drafted and enacted in a little more than a week.  The non-retirement plan provisions of the CARES Act will provide welcome relief to employers and employees in a time of urgent need.  But the retirement plan provisions create a number of questions and concerns.  Hopefully, additional guidance will be issued soon to address these questions and the great majority of employees will be able to get through the crisis without having to access their retirement accounts.  In the meantime, if you have any questions about these new provisions, please contact a Miller Johnson benefits attorney.