COVID-19 — Tax Planning Opportunity for Defined Benefit Participants?

By , and on April 14, 2020

Much has been written about the new CARES Act distribution that allows impacted COVID-19 participants to access up to $100,000 in their tax-qualified defined contribution plan penalty-free and with income taxes spread over three years. However, the CARES Act legislation applies to all “eligible retirement plans” as defined in Code Section 402. So technically the CARES Act also applies to defined benefit plans.

Consider, the following examples.

  • A cash balance plan permits lump sum distributions to terminated participants. If this cash balance plan decides to add CARES Act distributions, and if its record keeper will administer the provisions, terminated participants who meet the CARES Act conditions can access their funds penalty-free and spread the income tax consequences over three years.
  • In addition, if a plan will offer a lump sum window during 2020, then participants who qualify under the CARES Act distribution rules could elect a lump sum and use the favorable tax treatment for the applicable portion of the distribution, up to $100,000.

Note that the $100,000 limit applies across all plans, so a participant in both a defined contribution plan and a defined benefit plan will need to ensure that the limit is applied to all plans in which he or she participates.

Given all the difficulties that both employees and retirees are experiencing with COVID-19, a plan sponsor may want to explore all available COVID-19 distributions under the CARES Act, including options for its defined benefit plan with its actuaries, record keepers, and attorneys.

Erin TurleyErin Turley
  Erin Turley focuses her practice on employee benefits matters. She has extensive experience handling issues pertaining to the Employee Retirement Income Security Act of 1974 (ERISA) and employee stock ownership plans (ESOPs). Read Erin Turley's full bio.


Diane MorgenthalerDiane Morgenthaler
  Diane M. Morgenthaler focuses her practice on employee benefits and executive compensation. She represents clients in matters before the US Internal Revenue Service, the Department of Labor and the Pension Benefit Guaranty Corporation. Diane serves as employee benefit counsel to Fortune 500 corporations and other global corporations, and represents both public and private clients. She regularly designs and implements a variety of employee benefit plans and programs. Diane has extensive experience in employee benefit issues involved in acquisitions, reorganizations and divestitures and in the design of employee benefits plans following such transactions. She also advises clients in matters involving multi-employer withdrawal liability, fiduciary liability and benefit claims. Read Diane Morgenthaler's full bio.


Todd SolomonTodd Solomon
Todd A. Solomon is the head of McDermott’s Benefits, Compensation & Employment Practice Group. Todd focuses his practice on designing, amending and administrating pension, profit sharing, 401(k), employee stock ownership and 403(b) plans, as well as nonqualified deferred compensation arrangements. He also counsels privately and publicly held corporations and tax-exempt entities regarding fiduciary issues under the Employee Retirement Income Security Act (ERISA), employee benefits issues involved in corporate transactions, executive compensation matters and the implementation of benefit programs for domestic partners of employees. Read Todd A. Solomon's full bio.

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