COVID-19, Market Turmoil and the CARES Act
Understand the provisions of the CARES act that will have the most impact on retirement plans and American workers.
By Neil Lloyd, Head of US Defined Contribution and Financial Wellness Research, Mercer
With the coronavirus (COVID-19) sadly taking so many lives around the globe, the focus of government leaders and health providers is appropriately on public health and trying to ensure the numbers do not get out of hand. It’s nearly impossible to read or watch the news without hearing about “flattening the curve.” Social distancing is now accepted, and the majority of us who are lucky to do so are working from home (not always by choice). In this environment, those who now provide essential services — health care workers, grocery store employees, drivers, delivery people, etc. — are true heroes.
Those who now provide essential services — health care workers, grocery store employees, drivers, delivery people, etc. — are true heroes.
From a financial perspective, things are clearly tough. Equity markets were down sharply in March, with volatility spiking at month-end. Hopefully markets will recover when the COVID-19 crisis begins to normalize — historically the case with other market shocks. Unless plan participants need immediate liquidity, most people have some time to ride the market volatility out. The more immediate financial hit has been on businesses that have had to close (e.g., retail stores), or have no (or few) customers (e.g., hotels, airlines). Both have taken an abrupt toll on many Americans’ ability to make a living, either through layoffs, furloughs or fewer shifts.
Congress responded in a number of ways. The latest of these, contained within the $2.1 trillion Emergency Relief Bill signed into law last week, is the 893-page Coronavirus Aid, Relief and Economic Security Act (CARES Act), which includes important provisions related to expanded unemployment insurance and tax credits for individuals and employers. It also contains some, but not all of the retirement-relief provisions that Mercer has advocated for a long time.
To get additional insights on how the CARES Act affects workers and employers, I spoke with Chris Mahoney, Mercer’s US Wealth Leader. (For a more detailed summary of the retirement provisions, please visit Mercer’s GRIST site.)
Neil Lloyd: Chris, a month ago you argued that the US needs to address broader financial wellness needs than just retirement. The direct relief provided by the CARES Act seems to do exactly that, with its immediate goal to address financial hardships. Can you describe the direct relief that will flow once CARES is enacted?
Chris Mahoney: The Act allows participants in defined contribution (DC) plans to access their funds to address immediate needs. For instance, employers can now let participants borrow up to $100,000 from their DC plans without having to pay the 10% penalty tax (prior to age 59½). And employers can double their plans’ loan limit from the lesser of $50,000 or 100% of their vested account balance to the lesser of $100,000 or 100% of their vested account balance. For participants taking out new loans or participants with existing loans, any repayment that would be due between the enactment of CARES and before Dec. 31, 2020, would be delayed for a year.
This relief is broadly available to individuals who have been diagnosed with COVID-19, as well as those who have spouses or dependents who have been diagnosed. It’s also available to people who aren’t directly affected by the virus, but who have suffered financially as a result of being quarantined, furloughed or laid off — or simply having had their hours reduced or lost access to childcare.
Neil Lloyd: What about the changes to Required Minimum Distributions (RMDs)?
Chris Mahoney: The Internal Revenue Code’s minimum distribution rules force most people to start taking money from their DC plans and IRAs when they reach a certain age. The SECURE Act raised the age of RMDs to 72, but people who turned 70½ last year would generally have had to start taking distributions in 2020. The bill gives retirees the option to not take RMDs in 2020. This is significant because the required distribution amount is based on the prior year-end account balance. For most people, account balances on Dec. 31, 2019 were significantly higher than they are now. So this helps people who don’t want to be forced to sell assets when the market is down. One thing to note — the relief only applies to certain qualified plans and IRAs. RMDs from defined benefit (DB) plans aren’t waived for 2020.
Neil Lloyd: What about relief for defined benefit plans?
Chris Mahoney: DB plan sponsors, who usually have to make contributions in four quarterly installments (plus a final contribution due 8½ months after the end of the plan year), will get an extension for all required contributions during the 2020 calendar year. Sponsors can push those contributions off until Jan. 1, 2021. This is just a deferral, though, not a waiver. When the sponsors make those contributions, they will have to include extra interest. But in the meantime, they can use that cash for more urgent needs.
Underfunded DB plans are subject to restrictions on accelerated payments such as lump sums and might need to freeze benefits if their funding levels drop too low. The Act lets sponsors use their 2019 funded percentage to determine whether they’re subject to benefit restrictions in 2020.
Neil Lloyd: I gather defined benefit plan sponsors were hoping for more funding relief from the bill. Where does it fall short?
Chris Mahoney: The contribution deferral doesn’t address some fundamental difficulties DB plan sponsors were facing before the markets turned. Interest rates are at historical lows and the equity markets have dropped precipitously, significantly reducing the funded status of many plans. Mercer, along with industry trade groups, has lobbied to get longer-term funding relief into the Act. The House version included an extension of the interest-rate stabilization that’s been in effect since 2012, along with an extension of the shortfall amortization period from seven to 15 years. But both of those proposals were dropped during negotiations with the Senate. Still, we expect another couple of rounds of relief legislation, and we hope that these provisions will be considered for inclusion in those bills.
Neil Lloyd: Thanks, Chris.
And to our valued readers out there, please stay safe and ideally, stay home.
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