Deferred Compensation (DC) Plans and the CARES Act
Recent Legislation Passed by Congress Provides Increased Flexibility for Your DC Plan
The CARES Act recently passed by Congress provides increased flexibility for employees to take hardship withdrawals or loans from their 403(b) and 457(b) deferred compensation plan(s). The Act provides for:
- Waiver of Required Minimum Distributions (RMD) for 2020
Former employees who would normally take an RMD because they are older than age 70 ½ (72 in some cases) may waive the RMD from their 403(b) and 457(b) plan(s) for calendar year 2020.
- Coronavirus-Related Hardship Distributions
During calendar year 2020, employees may request a distribution from his/her 403(b) and/or 457(b)* plan if he/she (or the employee’s spouse/dependent) has been diagnosed with COVID-19. To be eligible, the diagnosis must have been performed using a test approved by the CDC.
Additionally, an employee who experiences adverse financial consequences as a result of COVID-19 may qualify for a distribution. This is available if the employee has been quarantined, furloughed or laid off, or has had their work hours reduced. The hardship distribution also applies to an employee who is unable to work due to lack of childcare, or who has been required to close or reduce operating hours of a business he/she owns.
If eligible for a hardship distribution, the CARES Act provides:
- Penalty-free withdrawals (for in-service distributions made prior to age 59 1/2)
- Waiver of the 10% tax penalty (up to $100,000 per individual), when the distribution is made between March 27, 2020 and December 31, 2020. The $100,000 limit is aggregated across individuals’ 401(a)/(k), 403(b), governmental 457(b) plans and IRAs.
- Regular income tax due on coronavirus-related distributions is spread over 3 years unless the individual elects otherwise (i.e., 20% withholding is not required).
*Applies only to the 457 defined contribution component of the VRS Hybrid Plan.
- Coronavirus-Related Loans
Deferred compensation plan participants who qualify for a coronavirus distribution (as described above) may also access expanded loan provisions. These provisions apply to any new or pre-existing loan that is made to a person eligible to receive a coronavirus-related distribution. Expanded loan provisions include:
- An increase to the maximum loan limit (from $50,000 or 50% of the vested account balance to $100,000 or 100% of the vested balance). This applies to for new qualified loans taken between March 27, 2020 and September 23, 2020.
- Expanded payment terms. Participants who are eligible for a COVID-19-related distribution may apply to have their loan payments delayed by one year. Subsequent payments will be adjusted to reflect the delay and the interest accrued during that period. Additionally, the 5-year loan limit may be disregarded for these purposes.
While the waiver of the Required Minimum Distribution (RMD) applies to all participants, an employee must apply for a coronavirus related distribution or loan. It is important to note that these provisions apply only to deferred compensation plans and do not pertain to defined benefit plans (such as ERFC/VRS/FCERS).
Contact information for FCPS 457(b) providers can be found at on the FCPS Approved 457 Providers website.
Contact information for FCPS approved 403(b) providers can be found on the FCPS Approved 403 Providers website.