The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27, 2020. Although the Act contains several provisions related to retirement plans, many of those provisions are not immediately applicable to the retirement plans administered by PEBA. For example, some provisions relate to plan features that are not currently offered by these plans or relate to different types of retirement plans altogether. The information below describes the mandatory provisions of the CARES Act that will take effect automatically for the retirement plans administered by PEBA. PEBA is continuing to review the other provisions of the CARES Act and will provide additional guidance as we assess whether any of the non-mandatory provisions of the Act will have an impact on the retirement plans.
Defined benefit plans
PEBA administers five defined benefit plans:
- South Carolina Retirement System (SCRS);
- Police Officers Retirement System (PORS);
- General Assembly Retirement System (GARS);
- Judges and Solicitors Retirement System (JSRS); and
- South Carolina National Guard Supplemental Retirement Plan (SCNG Plan).
The CARES Act provides mandatory tax relief for certain retirement plan distributions made during 2020. As implemented for the defined benefit plans administered by PEBA, this tax relief will not create a new type of distribution for the defined benefit plans. However, if a member or beneficiary has a distributable event under the existing plan provisions and certifies that the distribution meets the CARES Act requirements for a “coronavirus-related distribution,” the distribution may be eligible for the tax relief provided by the CARES Act for such distributions.
To receive the tax relief for a distribution as a coronavirus-related distribution made during 2020, the recipient (i.e., member or beneficiary) must certify that he or she meets one or more of the following coronavirus-related criteria:
- Recipient has been diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;
- Recipient’s spouse or dependent (as defined in section 152 of the Internal Revenue Code of 1986) has been diagnosed with such virus or disease by such a test; or
- Recipient experienced adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, or closing or reducing hours of a business owned or operated by the recipient due to such virus or disease.
In addition, because an individual cannot claim coronavirus tax relief for more than $100,000 in retirement plan distributions in a calendar year, the recipient must also certify that the distribution from the defined benefit plans administered by PEBA will not cause the recipient to exceed that limit.
For the defined benefit plans administered by PEBA, distributable events that may be eligible to be considered coronavirus-related distributions include:
- Refunds; and
- Direct payment of death benefits.
Members receiving a coronavirus-related refund of their retirement contributions during 2020 would not be subject to the automatic 20 percent federal income tax withholding. Also, members under age 59½ at the time of the refund distribution would not be subject to the 10 percent early withdrawal tax penalty. The waiver of mandatory withholding does not necessarily mean taxes will not be owed on the distribution. Members should consult with a tax advisor for more information on tax implications. Members are required to complete the COVID-19 Certification (Form 4275) certifying that the refund meets the requirements of a coronavirus-related distribution.
Members who received a coronavirus-related refund and later return to covered employment would have three years from the date of the distribution to repay contributions to re-establish their service credit without interest. The repayment of contributions after that three-year period would be subject to interest.
Beneficiaries who choose to receive a direct payment of benefits rather than rolling the amount over into another qualified retirement plan for coronavirus-related reasons would be exempt from the automatic 20 percent federal income tax withholding during 2020. The waiver of mandatory withholding does not necessarily mean taxes will not be owed on the distribution. Beneficiaries should consult with a tax advisor for more information on tax implications. Beneficiaries are required to complete the COVID-19 Certification (Form 4275) certifying that the direct payment meets the requirements of a coronavirus-related distribution.
State Optional Retirement Program and S.C. Deferred Compensation Program
For both the State Optional Retirement Program (State ORP) and the South Carolina Deferred Compensation Program (Deferred Comp), the CARES Act provisions of providing tax relief for coronavirus-related distributions made in 2020 under existing plan terms and the waiver of required minimum distributions (RMDs) for 2020 will take effect automatically. The third-party administrators of the plans will implement the provisions as soon as possible. As implemented, this tax relief will not create a new type of distribution for State ORP or Deferred Comp. However, if a participant or beneficiary has a distributable event under the existing plan terms (i.e., severance of covered employment), and certifies that the distribution meets the CARES Act requirements for a “coronavirus-related distribution,” the distribution would be eligible for the tax relief provided by the CARES Act for such distributions. The waiver of mandatory withholding does not necessarily mean taxes will not be owed on the distribution. Participants should consult with a tax advisor for more information on tax implications.
In addition, for Deferred Comp, the provisions of the CARES Act extending certain loan repayment dates will take effect automatically and will be implemented by Empower Retirement. No other plan changes are effective for State ORP and Deferred Comp at this time.