The Impact on U.S. Retirement Plans

The Coronavirus Aid, Relief and Economic Security (CARES) Act provides relief to taxpayers affected by the novel coronavirus (COVID-19). Included within the CARES Act are provisions for retirement plans with relief for individuals and businesses.

For Individuals:

Coronavirus-related distributions (CRDs): The CARES Act provides relief for participants directly impacted by COVID-19, those participants include:

  • The participant, participant’s spouse or participant’s dependent(s) have been diagnosed with the virus SARS-CoV-2 or with COVID-19, as confirmed by a CDC approved test; or
  • The participant experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, experienced reduced work hours, or is unable to work due to lack of childcare because of the pandemic.

CRDs prior to December 31, 2020 offer the following relief:

  • Withdrawals of vested amounts up to $100,000 are not subject to 10% early distribution penalty;
  • Income on CRDs can be included in income ratably over a three-year period;
  • CRDs can be repaid to the plan over a three-year period and will be treated as tax-free rollovers of the distribution; and
  • CRDs are subject to Federal and State income tax, however the standard 20% Federal Income Tax is reduced to 10%, and can be waived by the participant at the time of withdrawal.

Required Minimum Distributions (RMDs) Suspended for 2020: Individuals do not have to take their 2020 RMDs from their Defined Contribution plans, including 401(k), 403(b), 457(b) and IRA plans. This avoids lost earnings power on the taxes due on distributions and maximizes the potential gain as the market recovers. Unfortunately, this waiver is not extended to RMDs from Defined Benefit or Cash Balance Plans. Individuals can rollover or return RMDs processed within 60 days. We recommend contacting your third-party administrator or record keeper if you do not want your 2020 RMD to be processed or if you want to rollover/return an RMD processed within the last 60 days.

401(k) Loan Provisions Expanded:

New loans taken between March 27, 2020 and September 23, 2020 (180 days after enactment) for COVID-19 Qualified Individuals only (same qualifying criteria as for CRDs) have temporarily increased loan limits: the lessor of $100,000 or 100% of a participant’s vested account balance.

Existing loans and new loans for COVID-19 Qualified Individuals are granted a one-year extension of time for remittance of loan payments otherwise due between March 27, 2020 and December 31, 2020; as well as provides up to a one-year extension of the standard maximum 5-year repayment period with any missed repayments amortized over the extended period.

For Businesses:

Business leaders face an array of questions they need to answer and information they must analyze during the rapidly evolving response to the COVID-19 pandemic.

While decisions about safety and business operations are obviously top priorities now, plan sponsors and fiduciaries still must maintain compliance for their retirement plans. We are here to help you navigate these decisions. We address four of the most immediate questions that companies should be considering related to their retirement plans.

Can plans reduce or eliminate matching contributions?

Reducing or eliminating matching contributions may seem like an immediate way to reduce cash outflows. But plan sponsors need to examine their plan documents to determine whether changes can be made, and the requirements related to such decisions.

In general, plans can reduce or eliminate discretionary non-elective and discretionary matching contributions without needing to amend plan documents. If a company decides to do this, however, it is important to have a thoughtful strategy for how to communicate these changes to employees.

Fixed contributions, however, can only be eliminated by plan amendment, and once participants have fulfilled the requirements to be eligible for a fixed contribution, it cannot be eliminated. Plan sponsors should consider amending the plan to reduce or eliminate a fixed contribution rate and amend to allow for discretionary contributions, to evaluate as late as the plan sponsor’s due date of their tax return.

Many plans operate as Safe Harbor 401(k) plans, which waive certain nondiscrimination testing requirements. The Safe Harbor match can be reduced or eliminated only if (1) the plan sponsor is operating at an economic loss, or (2) the annual safe harbor notice includes a statement that reserves the right to change the contribution schedule midyear. Satisfying one of these options still comes with a few strings attached and matters to consider:

  • Participants must receive a notice 30 days before the effective date of the change and be given a reasonable timeframe to change their deferral amount
  • The plan loses its safe harbor status for the year and must undergo nondiscrimination ADP/ACP testing
  • If the plan does not pass ADP testing, highly compensated employees may be required to receive refunds for any excess contributions and plan sponsors should notify such participants to review their deferrals
  • Additional employer contributions may be required for Top Heavy plans

Insight: Plan sponsors need to carefully consult their plan documents to understand their options for potentially reducing or eliminating matching contributions, as well as the process and timing requirements for such decisions. In terms of depositing employee contributions, plan sponsors should keep to their regular schedule; failure to do so may result in severe penalties.

Will layoffs impact plan vesting?

Yes, it’s possible employee layoffs will result in affected participants becoming 100% vested if the plan is deemed to have a partial plan termination under the IRS rules.  Generally, a partial plan termination occurs when 20% or more of plan participants are terminated during a plan year, or if an office/plant is closed or business division eliminated. Affected participants that are less than 100% vested in employer contributions will become 100% vested and any distributions with forfeitures must be corrected.

Will the Department of Labor and/or Treasury delay filing deadlines?

As of March 27, filing deadlines for retirement plan documents haven’t been delayed. While President Trump has declared a nationwide emergency, no subsequent guidance or relief has been issued by the Department of Labor (DOL) or the Treasury Department, which oversees the Internal Revenue Service (IRS).

Historically, departments have issued guidance and postponed deadlines during natural disasters, such as Hurricanes Irma and Maria in 2017. The IRS has broad authority to postpone certain deadlines after the president declares a disaster.

On March 16, the American Retirement Association (ARA) issued a letter asking the Treasury Department and DOL to push upcoming deadlines, including:

  • Extend Form 5500 deadlines from July 31 to October 15 for calendar plan years (and similar extensions for non-calendar plan years)
  • 90-day extension for failed ADP or ACP testing and a similar extension for distributing excess contributions without the 10% tax penalty
  • 120-day extension for defined benefit plan reinstatement (currently April 30, 2020)
  • 90-day extension for 1099-R e-filings for employers (currently March 31, 2020)
  • Reasonable relief from required plan participant notices

Insight: We are closely monitoring the situation and will issue an alert to plan sponsors if filing deadlines change. Until then, plan sponsors should prepare to meet the current requirements

Is cybersecurity still a high-priority consideration for plan sponsors?

Absolutely, retirement plan communications contain highly sensitive information. As more people are working from home, cyber criminals see this as an opportunity to access sensitive data through phishing emails and exploit gaps in remote technology systems. The Cybersecurity and Infrastructure Security Agency (CISA) issued a warning  for people to be aware of cyber scams related to COVID-19. CISA also offered recommendations for organizations with employees working offsite.

We recognize that these rules can be complex, and we are happy to assist with any situation that arises to help make sure you and your participants are protected by taking correct action.

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