Job loss, reduced hours, illness, caretaking responsibilities and more – coronavirus continues to produce a raft of economic uncertainties and financial hardships for individuals. The Coronavirus Aid, Relief and Economic Security (CARES) Act includes several changes to retirement plans designed to give individuals greater flexibility and access to financial assets during the pandemic.
Retirement plan sponsors must thoroughly review and familiarize themselves with these new provisions, which are allowable only for calendar year 2020, as part of their fiduciary responsibility for the plan and its participants. Read on for more detail on the changes and what plan sponsors should consider when making these options available to their participants.
Three changes for defined contribution plans
For defined contribution plans, such as 401(k)s, there are three key changes available to participants during the calendar year 2020 only. Plan sponsors can opt out or adopt these changes. Adoption can be immediate without a formal amendment; however, an amendment must be formalized in writing on or before the last day of the first plan year beginning on or after January 1, 2022.
- Coronavirus-related distribution (CRD): A participant (active or terminated) can make an early withdrawal of up to $100,000 from their 401(k) plan or IRA. The typical 10 percent penalty on early withdrawals is waived and the tax associated with the CRD can be paid ratably over a three-year period. An individual may repay the CRD back into the plan, tax-free, over the three years from the date of withdrawal.
- Plan loans: Typically, plan loans are limited to the lesser of $50,000 or 50 percent of a participant’s vested balance. Under the CARES Act, for participant loans taken between March 27 and September 23, 2020, loan limits may be increased to the lesser of $100,000 or 100 percent of the participant’s vested balance. Participants with existing outstanding loans with payments due between March 27 and December 31, 2020, can delay repayments for up to one year. Interest will accrue on the delayed payments. Please note, the loan term can be extended to account for the delayed repayments so that these amounts remain close to the original repayment and not become a financial hardship on the participant once payments resume.
- Required minimum distributions (RMDs) waived for 2020: This option allows retirees to leave defined contribution plans untouched for another year, which is beneficial in light of market volatility and decline in retirement account balances. Learn more about this change and planning notes for participants to consider.
To qualify for a CRD or loan limit adjustment, an individual must meet one of the following criteria:
- Diagnosed with COVID-19
- Spouse or dependent diagnosed with COVID-19
- Experiencing adverse financial consequences due to furlough, quarantine, layoff, reduction in hours, inability to work due to lack of child care due to COVID-19 or closing of business due to COVID-19 (participant, spouse or member of the housedhold)
Individuals seeking to qualify for these options must provide a self-certification letter or form to the plan sponsor.
Defined benefit plan change
There are also provisions in the CARES Act to lighten requirements around defined benefit (pension) plans. Any contributions by employers (including quarterly contributions) due in calendar year 2020 can be delayed until January 1, 2021. It is important to note that interest would be due on the delayed contributions from the date originally due until the date of actual payment. In addition, the delaying of contribution payments could impact the year in which the contribution would be deductible for tax purposes.
Plan sponsor considerations
Plan sponsors should keep the following concepts in mind as they continue to administer their retirement plans in accordance with fiduciary responsibilities:
- Plans may see an increase in the number of loans and the dollar amount of loans which could cause additional administrative burden.
- If 20 percent or more of a workforce has been laid off or furloughed, it may trigger a partial plan termination. Affected participants should be considered fully vested in their account balance as of the date of the full or partial plan termination.
- As it relates to investment performance, continue to monitor, ask questions and properly document steps taken by the fiduciaries to monitor the situation.
- As companies design creative compensation structures for employees who may be partially furloughed, be mindful of how these new sources of compensation fit into the retirement plan’s definition of compensation.
- Plan sponsors considering a reduction or elimination of 401(k) employer contributions and those are not discretionary, the retirement plan may need to be amended. Be sure to provide employees advance notice of any change to employer contributions.
- A reduction in workforce could negatively impact a plan’s nondiscrimination testing.
Managing the wide range of changes, options and new provisions can be challenging, but retirement plan sponsors don’t have to go it alone. RKL’s Employee Benefit Plan advisors have the necessary administrative and compliance expertise to help sponsors maintain a high level of fiduciary responsibility and administer plans appropriately.