A CARES Act provision offers some relief to employee stock ownership plans by allowing the suspension of required minimum distributions for 2020.
In addition to providing individual stimulus payments and other individual-oriented assistance, the CARES Act contains some provisions aimed at retirement plans, some of which are of particular interest to companies that maintain employee stock ownership plans (ESOPs).
All of the retirement-related provisions of the CARES Act are optional, but amendments will be required later if ESOP sponsors choose to operate their ESOPs this year in accordance with such provisions. Some provisions of the CARES Act offer no relief to an ESOP sponsor with respect to its repurchase obligation; for example, offering coronavirus-related distributions of up to $100,000 would increase an ESOP sponsor’s repurchase obligation. However, one CARES Act provision offers some, albeit limited, relief for ESOP sponsors—namely, the suspension of required minimum distributions for 2020.
Similar to the required minimum distribution waiver that was available in 2009 during the Great Recession, an ESOP sponsor can postpone all required minimum distributions that are scheduled to be made in 2020, and postpone all required beginning dates that would occur in 2020 by one year, i.e., until April 1, 2021. Adopting this CARES Act provision would offer some relief to ESOP sponsors with respect to their repurchase obligation, depending on the number of participants who are expected to receive a required minimum distribution in 2020.
Amounts distributed in 2020 that would have been required minimum distributions but for the CARES Act relief will not be considered eligible rollover distributions for purposes of 20% withholding, and will not require employers to provide the special tax notice applicable to eligible rollover distributions. However, such amounts are eligible for rollover by the participant to an eligible retirement plan.
If ESOP sponsors choose to take advantage of this suspension of required minimum distributions for 2020, an amendment will need to be adopted no later than the end of the plan year beginning on or after January 1, 2022.