With the uncertainty in the world economy and the ongoing effects of coronavirus, we know that everyone has lots of questions.  This FAQ provides some high-level answers to some of the most common questions our industry is asking.

The axiom that the only constant is change is certainly true here, so we anticipate updates and additions to this list over the next several weeks as we receive new questions and, hopefully, as lawmakers provide additional relief.  We will also be expanding on some of the questions in this FAQ in our blog under Questions of the Week.  Rest assured the one thing that won’t change is DWC’s commitment to providing you the latest information and the potential impacts to the industry as a whole and to plan sponsors.

The answers provided in this FAQ are general, but we are here to help you walk through how this impacts your plan specifically.  Please do not hesitate to contact your favorite consultant, but if in doubt who to call, please reach out to either one of the following:

From a business perspective, we’re here for you, just like always.  DWC has been setup in a remote/virtual environment since we started the company.  That means we have been able to continue operations uninterrupted while still keeping our team safe and following published guidelines for social distancing.  All of our systems, including phone and email, are already set up so that you can reach us when you need to.  We are also able to set up video calls, if for no other reason than to see another face during this time of social distancing.  It’s nice to know there are some things you can count on during this tumultuous time and your DWC Team is one of them!


Company Contributions

We have a safe harbor 401(k) plan.  Can we amend our plan to remove the required company safe harbor contribution?  If so, when?

Yes, you can amend your plan to eliminate the safe harbor contribution.  This does require a formal plan amendment, and you are required to notify participants at least 30 days before the change can become effective.  There are some important caveats:

  • The safe harbor rules require you to fund the safe harbor contribution through the date the removal becomes effective.
  • The plan will be subject to the ADP and ACP tests for the entire year.
  • If the plan is top heavy and any key employees have deferred or received a company contribution, the company may be required to make a top-heavy minimum contribution for any participant employed on the last day of the plan year.

Note that DWC will waive its standard amendment fee for any client who elects to eliminate their safe harbor provision through at least May 31, 2020.


Can We Suspend our Safe Harbor Contribution Mid-Plan Year?

Get a more in-depth look at the options, requirements and deadlines for suspending safe harbor contributions here.

Our plan allows for discretionary matching and profit sharing contributions. Do we need to amend our plan in order to discontinue those contributions?

Generally, no.  Since those contributions are discretionary, the company more or less has the ability to start/stop or increase/decrease at any time.  With that said, if you have been depositing contributions periodically throughout the year, e.g. depositing matching contributions each pay period, discontinuing that match could result in having to make a true-up contribution at year end to ensure that the formula was applied uniformly to all participants.

If you are currently depositing your match each pay period, you may have the process automated such that your payroll provider calculates it and your recordkeeper automatically ACHs the total amount from your bank account.  If you wish to discontinue depositing your match each pay period, please be sure to coordinate with all of your providers.

DWC 401(k) Q&A Question of the Week

How Do We Stop Our Discretionary Matching Contribution?

If you are considering suspending your matching contribution to free up cash flow, here is what you need to consider.

We are concerned about our cash flow, but we still want to make the company contributions we promised our employees for 2019.  What flexibility do we have for actually depositing those contributions?

In order to deduct the company contribution for the year, you must deposit company contributions by the due date (with extensions) of the company tax return for the year.  That could be as late as September or October of this year for calendar year filers.  In addition to the deductibility deadline, there are also rules that specify when various contributions must be deposited to maintain plan compliance (think safe harbor contributions, top heavy minimums, and discretionary contributions).  We’ve got more details for you on this timing here.

We aren’t sure we will be still be able to make the company contributions we had planned for 2019.  Do we have any flexibility to not make those contributions?

Certain types of contributions are mandatory.  Think safe harbor contributions or top-heavy minimum contributions.  For those that are discretionary – match or profit sharing – things are a little trickier.  The reason is that what you have communicated to participants could come into play.  For example, if you encouraged participants to defer into the 401(k) plan by promising them a match, it may be difficult to back away from actually making that contribution now.  Since each situation will have a unique set of facts and circumstances, it is difficult to provide general guidance.

We have a cash balance plan and are concerned about the impact the market volatility will have on our required contributions.  How should we plan for this?

The first thing you can do is to amend your plan to freeze new benefit accruals.  It is important to note that this must be done before the first eligible participant works enough hours in the year to accrue a benefit.  Secondly, the funding rules give you the ability to amortize any shortfalls over a period of up to 7 years.  There are a few too many details to include here, but we will be contacting each of our clients with defined benefits plans separately to discuss.  In the meantime, we discuss how to add flexibility to your cash balance formula here.

The CARES Act, enacted on March 27, 2020, also provides some relief. The deadline for depositing contributions that would otherwise be due during calendar year 2020 is postponed until January 1, 2021. In addition, the plan can use its funded percentage for the 2019 plan year to determine its funded status for 2020, thus reducing the impact of the present market volatility.


Employee Deferrals

Our employees are really worried about the financial impact this will have on them.  Should I continue withholding 401(k) deferrals?

Yes.  Unless or until a participant makes an election to change or discontinue his or her deferral rate, it’s important to continue withholding according to what participants have elected.  There are, however, a few things that may provide some flexibility:

  • If your plan limits the frequency of deferral changes to something like quarterly or semi-annually, you can amend your plan to allow more frequent changes.
  • Many plans have language already included that allows participants to completely stop making deferrals even if changes are allowed less frequently.
  • Most plans have language that allows plan sponsors to set the procedure for making deferral changes. That means you probably already have the flexibility to accept change requests from employees by some means such as email rather than a using a special form.  Although we are primarily focused here on giving whatever relief is available, it is still important that you have documentation to support any deferral changes.

Whatever flexibility you choose to implement, just be sure you communicate and make it available to all of your participants.

Do the usual timing rules apply with respect to depositing employee deferrals and loan payments?

Yes.  The Department of Labor Regulations remain in place, requiring plans with fewer than 100 participants to deposit employee 401(k) and loan payments no later than 7 business days after withholding.  Likewise, the regulation that requires large plans to deposit deferrals and payments as soon as possible, remains in place.

For more details on these rules, click here.

If we run into cash flow issues, can we use employee deferrals to support our ongoing operations and deposit them when things have settled back down?

No, and we cannot emphasize that enough.  This is an issue that the DOL takes very seriously, and we have seen them assess extreme penalties even in situations when companies have done this just to keep their doors open and without any malicious intent.


Participant Loans and Distributions

Can or should we delay approving participant distribution requests until the stock market recovers some of its recent losses?

No.  Although we understand that you are only looking out for your participants, the plan specifies when participants are allowed to take distributions.  Most plans allow for them as soon as administrative possible following termination of employment.  So, if you intentionally delay processing a distribution request for anything beyond the normal administrative time frame, you would be going against the terms of the plan. 

But perhaps the more important reason, at least in terms of liability, is that if you hold on to a request for longer than administratively necessary and the market continues to decline, the participant could claim that it was your decision that cost them.  As a plan sponsor, you definitely do not want to make an investment decision on behalf of a participant which negatively impact a viable distribution request.  After all, delaying the distribution typically means delaying the liquidation of the investments so that cash can be distributed, which is an investment decision.'

Participants have been anxiously asking about access to their retirement plan accounts.  Are there any changes in the hardship distribution rules or availability?

While there have not been any changes to the hardship distribution rules, the CARES Act created a new type of distribution – the coronavirus-related distribution – which is more broadly available than the hardship.  See the next question and our CARES Act summary for additional information.


Can We Allow a Distribution for a Coronavirus-Related Hardship?

In these unprecedented times, employers are looking for ways to help support employees' needs. Here is what you need to know about permitting plan distributions for participants impacted by the coronavirus.

Is there anything else we can do to give our participants access to their accounts?

Yes, the newly passed CARES Act created the coronavirus-related distribution, which is broadly available to just about any plan participant impacted by the virus (due to diagnosis, loss of work or childcare due to the virus, etc.).  Affected participants are allowed to treat any withdrawal from their accounts, up to $100,000 during calendar year 2020, as a coronavirus-related distribution.  That includes any distributions they may have already taken prior to enactment of the new law (but not before January 1, 2020).

Both the 10% early withdrawal penalty and the 20% mandatory tax withholding are waived, and although participants must still claim the amount of the distribution as taxable income, they are able to spread it ratably over the three tax years from 2020 – 2022.  Those who take coronavirus-related distributions are also allowed to repay some or all of the amount taken over a three-year period from the date they actually receive the distribution.

That sounds like a lot of additional work on our part at a time when we are scrambling to keep our business going. What do we have to do to make this available to our participants?

The good news is that you don't have to do much at all. The coronavirus-related distribution is optional, so you don't have to offer it. However, if you do, there isn't really anything more you need to do. 

  • You are able to rely on participants’ self-certification that they are eligible for the distribution.
  • As long as you make sure you do not approve coronavirus-related distributions of more than $100,000 to any single participant from your plan (or the plans of any companies to which you are legally related through common ownership), you are not required to confirm a participant hasn’t already taken distributions from other plans or IRAs.
  • Repayments of coronavirus-related distributions are treated as rollover contributions into the plan, so you aren’t required to split out those repayments by money source or anything like that. The only time when you might be well-served to ask for additional information would be if a participant seeks to repay more than $100,000 (since that is the maximum allowed coronavirus-related distribution).

The only other thing to keep in mind is that you will eventually have to amend your plan document to reflect that you allowed this new type of distribution, but those amendments will not be due until the end of the 2022 plan year.

During other disasters, like Hurricane Katrina, participant loan rules were expanded to allow for loans up to $100,000 or 100% of a participant’s balance.  Is there any chance we will get similar relief now?

Yes, indeed.  The CARES Act increased the loan limit to the lesser of $100,000 or 100% of a participant’s vested account balance for any loans during the remainder of 2020.  Similar to the coronavirus-related distribution, the expanded loan limits are available to any participant who is affected by the virus through diagnosis of themselves or a family member as well as loss of work or childcare.  Also similar, plan sponsors can rely on a participant’s self-certification of eligibility.  If you choose to make the new limits available in your plan, that will need to be reflected in amendment at the end of 2022.

What about participants who currently have loans outstanding?  If their loan payments exceed their current paychecks (or absorb most of it) is there any reprieve here?

Yes, the CARES Act allows participants to elect to postpone for up to one year any loan payments (on new or existing loans) that would otherwise be due between March 27, 2020, and December 31, 2020.  Interest continues to accrue on those payments, but the 5-year maximum repayment term for non-residential loans can be extended by the length of the postponement.

If a participant with an outstanding loan is laid off, does he or she still have to repay the loan?

Yes, although the relief described above may allow them to postpone those payments for up to a year.  Most plans require loans to be repaid through payroll deduction unless the loan is being repaid in full.  Obviously, someone who is out of work no longer has payroll from which to deduct loan payments.  You do have the option to amend your loan policy to allow payment via some other means such as personal check, etc. once the payment postponement has ended  That would allow those out of work to continue to make payments to avoid default.

With that said, we do suggest caution.  If a former employee submits payment via personal check with insufficient funds, the plan could incur processing fees that the company would have to cover.  As a result, if you choose to give greater payment flexibility, it might be prudent to require payment via ACH or other online bill payment functionality that provides a greater assurance that funds are available.

Alternatively, a recent law change allows former employees with defaulted loans to repay them to an IRA.  It is up to the participant to establish the IRA account, but then he or she has until the due date of his or her tax return for the year of the loan default to fully repay the loan into the IRA.  For example, if the loan default occurs in 2020, the participant would have until the due date of the 2020 individual tax return (April 15, 2021 or later with an extension).  That not only avoids the income tax but also the early withdrawal penalty.  The participant would still receive a Form 1099-R from the plan, reporting the defaulted loan as a taxable distribution, so he or she would need to work with an individual tax advisor to ensure proper reporting.

Please note that the timing for loan defaults and deemed distributions is automatic under the rules and regulations.  That means you do not have the option to keep a loan “on the books” of the plan in “frozen” status in hopes that a former employee will be rehired.

For participants who have been laid off as a result of this pandemic, is there any relief from the early withdrawal penalty if they need to pull money out of their 401(k) accounts to get by?

Yes.  Participants in that situation can treat any distributions they take (up to $100,000 in total) during 2020 as coronavirus-related distributions, which qualify for a waiver of both the early withdrawal penalty as well as the mandatory withholding at the time of payment.  This is true even for distributions taken in 2020 before the March 27th enactment of the CARES Act.

What about required minimum distributions?  The last thing participants at that age need is to be forced to lock in market losses by taking RMDs.  Is there any relief?

Yes, the CARES Act waives any RMDs from defined contribution plans that would otherwise be due during calendar year 2020.


Employment and Plan Terminations

If a participant is laid off, is he or she eligible to take a distribution?

Yes.  A lay-off is considered a separation from service and is treated as any other employment termination in this context.  If a participant is rehired, he or she is no longer able to take a termination distribution.

As noted above, a participant in that situation can choose to treat distributions of up to $100,000 during 2020 as coronavirus-related distributions, which qualify for special tax treatment.

If we do have to lay off employees, how would that impact their eligibility for the plan once they are rehired?

Employees who are already eligible for the plan at the time of lay-off (even if not actively contributing) will be eligible for the plan immediately on rehire in the vast majority of cases.  They don’t even have to wait until the next plan entry date.  For those who have not yet joined the plan as of their lay-off date, the answer is a little more involved.  On rehire, they could join the plan on the next scheduled plan entry date or they may need to complete as much as a year of service, depending on the specific details and the employee’s pre-layoff tenure.

For a more in-depth discussion of determining eligibility for rehires, please click here.

I’ve heard something about a layoff of more than 20% of my workforce triggering some additional action with respect to the plan.  What is that about?

You are correct.  A so-called partial plan termination is deemed to have occurred if more than 20% of the plan participants cease to become eligible due to a single event or series of related events.  Before unpacking that a little bit more, we should note that the additional action that is triggered in a partial plan termination is that the affected participants must be immediately vested.  So, if your plan already provides for immediate vesting or all of your employees have worked for you for a long enough period, there is no practical impact here.

If you plan does have money that is subject to vesting, this is important to watch.  Since partial plan terminations look at a series or related events, a single layoff may be below 20% but when combined with a subsequent layoff due to the same economic downturn, the total may exceed 20%.  This is a facts and circumstances determination, so you may reasonably conclude that a partial termination has occurred at less than 20% turnover, or if turnover of more than 20% is normal for your industry, you may be able to conclude no partial term has occurred.

We’ve been asked whether we think the government is likely to provide any relief here.  Our opinion is that it is highly unlikely.  This rule is in place to protect participants from plan sponsors using an economic downturn as an excuse to terminate partially vested participants as a way to get access to non-vested dollars to offset other plan liabilities such as company contributions or service-provider expenses.  Since the current economic environment fits this reasoning, we don’t believe the government will relax these rules.

We simply don’t have the bandwidth (financial or otherwise) to continue our plan.  Can we terminate it altogether?

The short answer is “yes” though we would encourage you to call us (or your service provider) to discuss before doing so.  The plan termination process is relatively straight-forward.  The company must adopt a formal resolution to terminate, and then distributions are paid out to participants.  The plan is required to undergo all of the regular compliance testing, etc. and fund all required contributions for the part of the year prior to termination, and you must file a Form 5500 for each year (or portion of a year) the plan still has any undistributed assets.

With that said, there are several reasons we suggest a conversation before making this decision.  One is that since the plan must still undergo all of the regular year-end work anyway, terminating the plan might not actually save any money.  It may be just as cost-effective to amend the plan to eliminate any mandatory contributions (such as safe harbor contributions – see above) and/or to re-design the plan to make it more streamlined.  If you believe this downturn is temporary, you can also arrange for regular plan maintenance fees to be paid out of plan assets (see below).  In addition, there is a rule that says you are not allowed to start up a new 401(k) plan for a full year from the date the last distribution was paid from the plan you terminated.  Again, if you believe this is a temporary downturn, terminating your plan could have negative impacts following a recovery.

We can discuss the specific details of the situation with you to see if there is a way to salvage the plan while still addressing your current concerns.  If not and you determine that terminating your plan is the appropriate step to take, we can help you with that as well.



I’ve seen that personal tax return filing deadlines have been extended.  Does this mean the Form 5500 filing deadline has been extended too?

Not yet. The CARES Act specifically gives the Department of Labor the authority to postpone the filing deadline, but they have not yet done so.  While we are hopeful they will announce an extension soon, we are still working full steam ahead as if the current deadline (July 31st for calendar year plans, or October 15th if an extension is filed still applies.

What about plan document restatement deadlines? Have those been extended?

Yes. The IRS announced on March 27, 2020 that the deadline to restate 403(b) plans is extended from March 31, 2020 to June 30, 2020.  They also announced the extension of the restatement deadline for certain defined benefit plans from April 30, 2020 to July 31, 2020.

We want to continue to pay our plan service providers on time, but we also want to preserve our cash as much as possible. Can we pay expenses from the plan?

Yes, as a general rule, the fees associated with necessary plan services can be paid out of plan assets. Necessary plan services include things like annual testing and government reporting, mandatory plan amendments, recordkeeping, and investment advisory services.  Many recordkeepers have easy forms you can complete to either pay invoices from the plan on a one-off basis or to provide a standing request to pay all eligible expenses from plan assets. 

Is there anything special we need to do with respect to how we upload information to our recordkeeper?

At a time like this, it might be tempting to take short cuts where you can find them. However, we would encourage you to continue to diligently keep your various systems up to date.  That includes recording former employees properly on your payroll system, e.g. terminated, laid off, furloughed, etc. and also making sure that same information is included on the files you upload to your recordkeeper.  Ensuring that employee status, termination and rehire dates, as well as hours worked and compensation remain up to date also ensures that all parties can process transaction requests as quickly as possible.

Stay tuned for more details. We will continue to stay on top of this and will keep you up to date.  Want to get coronavirus updates delivered right to your inbox as soon as they are published? Subscribe to DWC 401(k) Q&A Updates and be among the first to get answers to Act questions and updates.

Contact us to learn how DWC's retirement plan experts can benefit your business