Efficacy of CARES Retirement Savings Relief Will Depend on Ability to Repay
By Ethan Heck, QKA
It’s been nearly seven months since the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted. Those in the retirement industry are starting to wonder just how effective the relief has been for those in financial need and how much momentum in retirement savings might yet be lost to coronavirus-related distributions (CRDs) and loans.
Employers and TPAs Report Early Hesitancy to Adopt CARES Act Relief
Statistics reflecting the actual use of CRDs and loans by participants are still far from comprehensive. The Plan Sponsor Council of America (PSCA) launched an early survey of employers in April, just two weeks following the passage of the CARES Act, to gauge whether plans were adopting the relief provisions. Early adoption appeared to be modest across the board, with a slightly higher early adoption rate by large employers. A survey by the American Society of Pension Professionals & Actuaries (ASPPA) in June covered mostly smaller employer-sponsored retirement plans, and the comments from third party administrator (TPA) members seemed to indicate that employers may still be waiting to adopt CARES Act relief provisions until participants show a clear need for it.
The Employee Benefits Research Institute’s (EBRI’s) recent projections in a July brief are the most comprehensive estimates so far on the long-term effects of CARES Act relief on retirement savings. The EBRI expresses retirement savings impact in terms of a multiple of pay at age 65, a measure that closely correlates to sustainability of retirement income. While analysis of the early PSCA survey may not be indicative of current adoption rates, if actual adoption remains as low as early indications show, the effect on retirement savings overall could be minimal (less than 0.5 percent).
Increased Use of Disaster Relief Directly Reduces Retirement Readiness
The EBRI report highlights two important caveats if actual use trends higher:
Failure to repay CRDs within the permitted three-year period will result in significant reductions in retirement balances, which will affect older individuals more drastically.
If CARES Act-like access to retirement savings continues during various crises over the next decade, the EBRI warns that the overall median reduction of retirement balances could be as high as 54 percent.
Repayment Can Restore Most of What Would Be Lost
Participants who’ve been furloughed, laid off, or had work hours reduced because of COVID-19 meet the definition of a qualified individual for CARES Act relief. Many of these same individuals may have taken loans or distributions from their retirement plans recently out of financial need. IRS Notice 2020-50 recognizes that eligible rollover distributions in 2020—including qualified plan loan offsets—can be considered CRDs by qualified individuals up to the $100,000 limit. Instead of facing immediate taxation on these distributions and loan offsets, qualified individuals may be taxed ratably over the next three years and will have the option to repay them.
As the EBRI noted in its brief, repaying CRDs over three years results in significantly better retirement outcomes, even if ongoing retirement contributions are reduced in an amount equal to the repayment. Regardless of plan provisions, the IRS will allow any qualified individual to treat eligible rollover distributions in 2020 as CRDs. The recently unemployed should be made aware of this, as the ability to repay CRDs may become a critical factor in an individual’s retirement readiness.
