March 31, 2020

Qualified Retirement Plans During COVID-19: The CARES Act and Other Considerations





Originally published March 31, 2020 – Last updated May 27, 2020

If you are a decision-maker or part of a COVID-19 response team at a U.S. business, you are making urgent, daily decisions that affect the health and wellbeing of your workers, customers and suppliers, as well as the long-term viability of the enterprise. At some point in the near term, your attention will need to turn to questions about your company’s retirement plans: whether to offer your workers the ability to take advantage of applicable relief provisions included in the recently enacted CARES Act; whether to delay or modify the funding schedule for single-employer pension plans sponsored by your company; whether to adjust matching or profit-sharing contributions for workers; and how to address current and possible future declines in the value of any company stock fund that may be part of a defined contribution retirement plan.

Set forth below are some of the key issues to consider as you analyze these questions.


The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) is the first piece of COVID-19-related federal legislation that directly addresses retirement funds.[1]

The CARES Act and Qualified Retirement Plans (Other Than Defined Benefit Plans)

The CARES Act allows qualifying individuals to seek tax-advantaged financial relief through distributions and loans from their retirement savings accounts, including from their defined contribution plans (such as Section 401(k) and Section 457 governmental plans) and individual retirement accounts (“IRAs”).[2] The CARES Act also waives required minimum distributions (“RMDs”) for certain defined contribution plans during calendar year 2020, offering relief to retired and retirement-aged individuals who would otherwise be required to withdraw funds from retirement accounts that have likely diminished in value as a result of recent fluctuations in the stock market.[3]

While these relief efforts can be effective immediately, in most cases, they may not be automatic: if employers’ retirement plans do not already include provisions that allow for distributions and loans under relevant circumstances, such as in the face of “hardship,” employers must decide as part of their COVID-19 response effort whether to make the plan-related relief available to their employees (even though under the CARES Act, formal amendments to a plan’s governing documents can be delayed until the last day of the first plan year beginning on or after January 1, 2022, or in the case of governmental plans, two years after that date). While the CARES Act allows covered plans to adopt these measures immediately and implement amendments later,[4] it does not require them to do so. In addition, employers electing to allow employees to take advantage of these CARES Act provisions will need to coordinate with third-party plan administrators and trustees to be certain that those service providers have the systems in place to administer these changes in a timely and accurate manner.

For corporate decision-makers, a number of factors will affect the choice to amend retirement plans, including:

  • The urgency of providing financial assistance to workers, and whether financial assistance can be accomplished by other means;
  • Whether workers remain active, are laid off or are on furlough;
  • The employer’s overall retirement program for workers and the impact that depleting 401(k) assets may have on that program;
  • Whether the amendment will apply to all or targeted plan participants; and
  • The effect that distributions will have on assets that have declined in value based on recent market performance.

Ultimately, your answer will likely balance the urgency of immediate financial support for your workers against the longer-term negative effects of depleting retirement assets and increasing withdrawals from your retirement program in a depressed market. You will also need to consider whether any employee communications on the topic are appropriate and, if so, develop a strategy for delivering them in a remote work environment. In our view, given the substantial press coverage on these aspects of the CARES Act, communications on these topics to workers may be advisable whether or not you are planning to take advantage of these changes.

Retirement Plan Distributions Under the CARES Act

Generally, individuals under the age of 59½ are subject to a 10% withdrawal penalty on the amount of any distributions from retirement plans, such as defined contribution plans and IRAs. The CARES Act provides relief by removing this 10% withdrawal penalty for “coronavirus-related distributions” of up to $100,000 per participant. “Coronavirus-related distributions” include distributions during the 2020 calendar year to individuals who (1) are diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention; (2) have a spouse or dependent who is so diagnosed; or (3) experience adverse financial consequences as a result of being quarantined, furloughed or laid off, or having reduced work hours, or who are unable to work because of a lack of child care or the closing or reduced hours of a business that they own or operate, in each case due to COVID-19, or other factors, as determined by the Secretary of Treasury.

The CARES Act does not prevent any taxable portion of the distribution from being treated as taxable income, but rather includes that portion of the distribution in gross income ratably over the three-taxable-year period beginning with the year in which the distribution is made. However, the CARES Act also allows the individual who received the distribution to recontribute up to the full amount of the distribution into an eligible retirement account within the following three-year period. The amount of the distribution that is recontributed is not subject to tax.

The mechanics of these provisions are not fully developed in the text of the CARES Act—i.e., how recontributing in year three would impact taxation that had occurred in years one and two—and we expect to see further guidance on this topic.

Retirement Plan Loans Under the CARES Act

The CARES Act expands the availability of loans from defined contribution plans. During the 180-day period beginning on the date of enactment of the CARES Act (i.e., March 27, 2020), loans from applicable retirement plans will not be treated as distributions if they do not exceed the lesser of (1) $100,000 (this is an increase from $50,000 under the current rules), reduced by the excess (if any) of (x) the plan’s highest outstanding loan balance during the one-year period ending on the day before the date on which the loan is made over (y) the plan’s outstanding loan balance on the date on which the loan is made; or (2) the greater of (x) the present value of the accrued benefits under the plan (this is an increase from one-half of the present value of the accrued benefits under the plan under the current rules) or (y) $10,000.

The CARES Act also provides relief for upcoming payments due under currently outstanding loans. If an individual has an outstanding loan from an applicable retirement plan on or after March 27, 2020 and the loan has a repayment date during the period beginning on that date and ending on December 31, 2020, the repayment date will be delayed for one year. Any subsequent repayments with respect to such a loan will be adjusted to reflect the delayed due date and any interest accrued during the delay. In addition, the delayed due date will be disregarded for purposes of determining the term of the loan and whether the loan’s term satisfies the five-year repayment period under the applicable provisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”).

The mechanics of the loan provisions are not fully addressed in the text of the legislation. For example, the CARES Act does not explicitly provide whether one individual is permitted to take multiple loans under these provisions.

Required Minimum Distributions Under the CARES Act

By waiving RMDs for certain defined contribution plans for calendar year 2020, the CARES Act relieves retired and retirement-aged individuals who would otherwise be required to withdraw funds from retirement accounts in unfavorable market conditions. For purposes of RMDs, any individual who turned 70½ prior to January 1, 2020 is considered to be of retirement age, and for all other individuals, retirement age is 72. 

Of particular help, this waiver is inclusive of RMDs for plan participants who have not yet taken their 2019 RMD and who otherwise would have been required to do so by April 1, 2020. Whether the RMD provisions in the CARES Act call for an amendment to a company’s retirement plan document or are self-effectuating will depend on how the applicable retirement plan is drafted, including, among other things, the extent to which the provisions of Section 401(a)(9) of the Code are incorporated by reference into the plan document.

The CARES Act and Defined Benefit Plans

Unlike defined contribution plans, defined benefit plans (also referred to herein as pension plans) are subject to annual funding requirements under the Code that are impacted by the market performance of the plan’s assets and long-term interest rates. Employers sponsoring pension plans, including frozen pension plans, could face increased pension funding obligations in future years as a result of the combination of market declines, declining long-term interest rates and the complex funding rules currently in the Code.

Under the CARES Act, minimum required contributions for single-employer pension plans, including quarterly contributions, that are otherwise due during calendar year 2020 are instead due January 1, 2021.[5] This provides the opportunity for relief to companies that sponsor single-employer pension plans that are struggling in the short-term and seeking to delay contributions in order to conserve cash, as it removes the possibility that late contributions will trigger adverse reporting requirements and participant notification obligations under the Code. The CARES Act requires that any delayed contributions be increased by interest accrued between the original due date and the date of delayed payment.

If a pension plan’s annual funding percentage (referred to in the Code as the adjusted “AFTAP”) declines below certain percentages specified in the Code, the plan will be subject to accrual and distribution limitations and the plan’s administrator will be subject to additional reporting and disclosure obligations. The CARES Act provides that a plan sponsor of a single-employer pension plan may choose to base the plan’s AFTAP for the last plan year ending before January 1, 2020 as the AFTAP for plan years that include calendar year 2020.[6] Thus, employers sponsoring single-employer pension plans may be able to avoid or mitigate adverse consequences related to any declines in the pension plan’s AFTAP during calendar year 2020.

Companies sponsoring single-employer pension plans should understand that these pension provisions are not mandatory and thus present choices: companies will need to determine whether to make contributions on their original due dates (for example, to give the plan additional assets to invest to take advantage of depressed equity values) or to delay these contributions (for example, to conserve vitally needed cash for the enterprise), and will need to evaluate whether it would be more favorable to rely on the AFTAP as prescribed by the CARES Act or to maintain regular practice with respect to measuring their plan’s funded status.[7]

Although calendar year pension plans will be required to make immediate decisions about how to handle current and upcoming funding requirements, companies should keep in mind that it is still early to predict the impacts of COVID-19 on 2020 and 2021 minimum funding requirements for calendar year pension plans. Poor market returns and low interest rates in the first half of 2020 may be at least partially mitigated by better market returns in the second half of the year.

The CARES Act—Other Provisions

The CARES Act amends the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) to provide the Department of Labor (the “DOL”) with the ability to postpone any deadline imposed by ERISA that is applicable to retirement plans (and related persons such as administrators and participants) affected by “a public health emergency declared by the Secretary of Health and Human Services.”[8]

To that end, on April 28, 2020, the DOL published EBSA Disaster Relief Notice 2020-01 (the “DOL Notice”), which extends the deadlines for furnishing certain required notices or disclosures to plan participants that would otherwise be required to be furnished between the period beginning on March 1, 2020 and ending on the date that is 60 days after the announced end of the COVID-19 national emergency. With respect to these deadlines, a responsible plan fiduciary acting in good faith will not be in violation of ERISA if the required notice or disclosure is provided as soon as administratively practicable under the circumstances (but no later than one year following the original deadline for the notice or disclosure). Good faith acts include the use of electronic alternative means of communications (such as e-mail, text messaging and continuous use websites) with plan participants and beneficiaries who the plan fiduciary reasonably believes has access to these means. Disclosures impacted by the DOL Notice include summary plan descriptions, summary annual reports, annual funding notices, periodic benefit statements and fee disclosures (the “Notice Disclosures”).[9] In addition, the DOL Notice makes clear that blackout notices are also subject to the relief without the requirement of 29 CFR 2520.101-3 that the fiduciary determine in writing that the inability to timely provide the blackout notice was due to events that were unforeseeable or beyond the reasonable control of the plan administrator.[10]

The DOL Notice also reminds plan administrators that the IRS had extended, for plans with IRS Form 5500 due in April, May or June 2020, the deadline for filing such form until July 15, 2020. Note that, as IRS Form 5500 is due on the last day of the seventh month following the end of the plan year, this relief would not be available for calendar year plans (as their IRS Form 5500 is due on July 31, 2020). Calendar year plans may, however, request an extension until October 15, 2020 by completing IRS Form 5558.

Finally, the DOL Notice explains that the DOL’s approach to enforcement during the COVID-19 outbreak will be to emphasize compliance assistance, including providing grace periods and other relief where appropriate.[11] In that spirit, the DOL also states that plan administrators should take a similar approach by attempting to minimize the possibility of individuals losing benefits because of a failure to comply with pre-established timeframes. The guiding principle for plans is to act reasonably, prudently and in the interest of the covered workers.

Relatedly, on May 27, 2020, the DOL published a final rule (initially proposed in October 2019) that will allow plan administrators to provide certain retirement plan disclosures, including the Notice Disclosures, to plan participants through electronic means, rather than in paper copy, as a default. The rule is effective July 27, 2020, but the DOL has announced that it will not take enforcement action against a plan administrator that relies on the rule before that date. Although not directly tied to the DOL Notice, this rule is also expected to provide relief to employers and plan administrators in light of the ongoing financial challenges created by COVID-19.

Employer Matching and Profit-Sharing Contributions

Employers looking to conserve cash for the remainder of 2020 or to address changing workforce dynamics as a result of the health and financial crises may be considering temporarily adjusting, reducing or eliminating matching and profit-sharing contributions in the company’s 401(k) or similar plan. Changes of this type are difficult even in less troubling times, and companies should be aware that, in many cases, adjusting these contributions may not be a straightforward process. Potential challenges include:

  • Administrative Burdens. If a plan document provides that the employer will make certain contributions, adjusting those contributions may require an amendment to the plan subject to special amendment and disclosure requirements and, in the case of collectively bargained plans, union consent.
  • Legal Requirements. If matching and profit-sharing contributions are required for compliance with the “safe harbor” provisions of the Code (which generally excuse the employer from certain annual compliance tests), midyear suspension or reduction of the contributions can typically only be accomplished if (1) the plan sponsor shows that it is operating at an economic loss for the plan year under the applicable provisions of the Code or (2) the annual notice relating to the plan that was distributed before the beginning of the plan year stated that matching contributions might be suspended or reduced during the plan year and that the suspension or reduction would not be effective until at least 30 days after all eligible employees are provided with a supplemental notice regarding the action. In both instances, the Code dictates the content and timing of notices relating to the adjustment. Employers making these adjustments will also need to consider alternative methods for assuring compliance with the Code’s additional testing requirements.
  • Company Optics. In general, the company should develop a communication strategy that explains to plan participants any adjustments to matching and profit sharing provisions and is delivered prospectively.

Employer Stock Funds

If your company’s 401(k) or other defined contribution plan has an employer stock fund, the fiduciaries at your company responsible for overseeing the plan’s investments will likely be considering the impact of the ongoing global health and financial crises on the fund. These fiduciaries may also be considering the fund’s short- and long-term prospects: Is it possible that the fund will experience further declines in value based on the company’s position in the global economy? Or will the employer stock fund see value recovery as the global health crisis abates and markets regain a sense of normalcy?

As a result of the Supreme Court’s seminal 2014 decision in Fifth Third Bancorp v. Dudenhoeffer,[12] fiduciaries do not benefit from a presumption of prudence for decisions to include or maintain a company stock fund in the plan’s investment line-up. In general, it also does not appear that employers can protect fiduciaries by mandating in a plan document that the plan include a company stock fund.

On the other hand, Dudenhoeffer established that plaintiffs must “plausibly allege an alternative action [related to the stock fund] that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”[13] The Supreme Court also emphasized that a plaintiff’s allegations that fiduciaries should have assessed publicly available information in a manner that is different than the market are “implausible as a general rule, at least in the absence of special circumstances.”[14]

Fiduciary considerations related to a stock fund will, of course, vary based on an employer’s particular situation, and given the rapid onset and broad scope of the global health and financial crises, it may be difficult for plaintiffs to assert successful claims regarding stock fund declines that have coincided with these events.

Nonetheless, fiduciaries will need to consider the role of the stock fund going forward and, as part of that process, fiduciaries responsible for plan oversight may find it advisable to:

  • Schedule a meeting in the near term to take input from the committee’s advisers and to assess the continuing role of the stock fund in the plan’s investment line-up;
  • Establish whether there is information about the company that should be disclosed, in compliance with the federal securities laws, to participants who are eligible to invest (or who have invested) in the stock fund and, if such information exists, how and when that information should be disclosed;
  • Determine whether there are any actions that could or should be undertaken with respect to the stock fund in a manner that will not do more harm than good to the stock fund;
  • Review plan-related disclosures and decide whether current stock fund disclosures need to be updated; and
  • Where fiduciaries are aware of material information about the company that has not been disclosed to the market and that bears on the question of the stock fund’s continued role in the plan, seek input from company or outside legal counsel on next steps.

Other procedures and actions are possible, but in all situations, plan fiduciaries should continue to exercise appropriate oversight and deliberation with respect to the stock fund.

Our Take

Companies should continue to consider how the global health and financial crises are impacting their unique workforce. In turn, companies should apply that understanding to decisions related to their qualified retirement plans. Doing so will help balance the immediate needs of workers with the short- and long-term priorities of the enterprise.

Special thanks to Ron Frank for his contribution to this publication.


[1]  See Client Alert (March 27, 2020).
[2]  CARES Act, H.R. 748, 116th Cong. § 2202 (2020).
[3]  Id. § 2203.
[4]  Id. §§ 2202(c) and 2203(c).
[5]  Id. § 3608(a). Companies should note that multiemployer pension plans are not entitled to the relief provided by the CARES Act. We also note that Section 3609 of the CARES Act provides certain relief to cooperative and small employer charity pension plans that is not addressed in this piece.
[6]  Id. § 3608(b).
[7]  The pension plan provisions in the CARES Act were added into the final iterations of the legislation and appear to follow concepts that were advocated by the American Benefits Council in a March 18, 2020 letter to House of Representatives Speaker Nancy Pelosi and Minority Leader Kevin McCarthy. Letter from Lynn D. Dudley, Senior Vice President, Global Retirement and Compensation Policy, American Benefits Council, to the Honorable Nancy Pelosi, Speaker of the House and the Honorable Kevin McCarthy, Republican Leader of the House (Mar. 18, 2020).
[8]  CARES Act § 3607.
[9]  On April 28, 2020, the Department of the Treasury and the DOL issued an additional joint notice that extended certain timeframes otherwise applicable to group health plans, disability and other welfare plans, pension plans, and their participants and beneficiaries. Notably, the joint notice provides that the 60-day election period for COBRA continuation will not begin until 60 days after the announced end of the COVID-19 national emergency.
[10]  This requirement is waived because “pandemics are by definition beyond a plan administrator’s control.”  Note, however, that this relief has yet to be extended to the requirement to issue notices to directors and officers pursuant to Regulation BTR (17 CFR Part 145), as those regulations are enforced by the SEC, not the DOL.
[11]  For example, the DOL Notice explicitly states that a temporary failure to forward participant payments and withholdings to employee pension benefit plan within prescribed timeframes (as a result of COVID-19) will not result in an enforcement action so long as the service provider complies as soon as administratively possible.
[12]  No. 12-751 Slip Op. (U.S. June 25, 2014).
[13]  Id. at 18.
[14]  Id. at. 16.

Special thanks to Ron Frank and Nathan Greene for their contribution to this publication.


John J. Cannon III



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