On Friday afternoon, March 27th, Congress passed, and the President signed, the Coronavirus Aid, Relief, and Economic Security (CARES) Act - sweeping legislation intended to provide much-needed relief due to the coronavirus public health emergency. At nearly 1,000 pages in total, the legislation covers a lot of ground in a many areas. With respect to company-sponsored retirement plans, the relief focuses on four areas:
- Creates a new type of distribution – the coronavirus-related distribution – to give access to those still employed as well as those out of work while minimizing some of the negative tax consequences
- Expands the availability of plans loans and allows for temporary suspension of payments
- Waives required minimum distributions for 2020
- Provides funding relief for certain defined benefit plans
In this section we're breaking down the Act's provisions and answering your most frequently asked questions. Want the full rundown? Find it here.
Act Overview | 3.30.2020The CARES Act was passed on March 27, 2020. We've taken a deep dive into the provisions and broken them down for you. Read the post here. The LegislationYou can access the full language of the Act pertaining to the Special Rules for Use of Retirement Funds here. Recordkeeper Adoption DefaultsA number of recordkeepers are already making decisions on whether they will automatically adopt CARES Act provisions for the plans they service. See a list of the firms that have decided how to proceed - courtesy of NAPA - here. Coronavirus-Related DistributionsHere is what you need to know about permitting plan distributions for participants impacted by the coronavirus. Expansion of Plan LoansThe CARES Act has doubled the maximum amount a participant can take as a loan from the plan. Get the details on this relief here. Postponing Loan PaymentsIn addition to increasing loan limits for those affected by COVID-19, The CARES Act also provides relief for participants with existing loans. Get the details here. Calculating ContributionsUnder the FFCRA employees impacted by the coronavirus are entitled to government-mandated PTO. Should you withhold deferrals from that compensation? What about it including it when calculating company contributions? Get the answers you need here. Plan Fees & ExpensesFor companies watching their cash flow, some may find relief from plan-related expenses by paying them out of plan fees. Find out whether your plan is eligible here. (For a review of which fees can be paid out of plan assets, click here.) Furloughed EmployeesHow does having furloughed employees at the end of the year impact your retirement plan? Find out. Coming SoonThere are plenty more CARES Act FAQs to come. Don't see what you're looking for? Ask your question here.
We have been flooded with emails talking about various types of governmental relief in the wake of the coronavirus pandemic. Can you please provide a brief summary?
There have been two laws enacted that provide certain forms of relief that impact qualified retirement plans. The Families First Coronavirus Relief Act (FFCRA) focused on paid leave and unemployment benefits. While not directly related to retirement plans, some of the paid leave benefits provided under FFCRA must be counted as eligible plan compensation, which could impact company contribution amounts.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides more direct retirement plan relief in several ways, primarily around making it easier for Qualified Individuals to access their accounts via expanded loan and distribution options. The small business Payroll Protection Program, part of the CARES Act, also indicates that the loan proceeds can be used to cover the cost of employee benefits, including retirement benefits.
We will cover the retirement-related provisions of FFCRA and CARES throughout this FAQ.
Are the relief provisions you mentioned automatic, or do we have to do something to make them apply to our plan?
The answer is a little bit of both. The reason is that, in general, most of the provisions in the CARES Act have two components – access via loans and distributions and the tax treatment of any amounts a participant receives. Plans generally have the option of whether or not they want to expand access, but once available, the tax-related relief applies to all participants who qualify. Formal plan amendments are not required until the end of 2022; however, we are recommending some sort of current documentation so that there are no questions down the road. We discuss that in more detail below.
You mentioned "participants who qualify." What makes a participant eligible for CARES Act relief?
In order to be eligible for the relief provided by the CARES Act, a participant must meet one of four criteria:
- The individual is diagnosed with COVID-19;
- The individual's spouse or dependent is diagnosed with COVID-19;
- The individual experiences adverse financial consequences due to him or her (or his/her spouse) being laid off, furloughed, or having a reduction in work hours related to the coronavirus pandemic; or
- The individual or his/her spouse is unable to work due to loss of childcare related to the coronavirus pandemic.
We will refer to participants who meet one or more of these criteria as “Qualified Individuals” throughout this FAQ.
You are generally able to rely on a participant’s self-certification that they meet one of these requirements, so you do not have to investigate further or ask for substantiation unless you have knowledge to the contrary. There is not requirement to ask questions, but you cannot ignore contrary information that you already happen to have.
See below for additional information about the employee self-certification.
The criteria to be a Qualified Individual note that diagnosis of a spouse or dependent counts. Is that also true for the last two criteria regarding loss of childcare and adverse financial consequences?
Yes. As the law was initially written, those last two criteria did not also cover spouses; however, the law gave the Treasury Secretary the authority to expand who is treated as a Qualified Individual. That happened in IRS Notice 2020-50, issued in mid-June.
What if an employee resigns or is terminated for some reason unrelated to the coronavirus pandemic?
That employee would not be a Qualified Individual and would not be eligible for the relief unless he or she meets one of the other criteria, e.g. COVID-19 diagnosis.
We are not planning to reduce anyone's work hours, but we are considering a temporary, across-the-board reduction in pay to help maintain cash flow. Would that make an employee eligible?
Yes, Notice 2020-50 includes reduction in pay as a qualifying reason, in addition to the original language in the CARES Act related to lay-off, furlough, or reduction of work hours.
We allow our employees to work from home without any reduction in hours. If an employee voluntarily reduces his or her hours due to too many distractions at home, does that qualify?
No, it would appear not. In that circumstance, the reduction in hours is voluntary and not due to the coronavirus pandemic. With that said, if the distractions are the result of children being at home due to pandemic-related loss of childcare, the participant may qualify based on that loss of childcare.
What if an employee has childcare available but chooses not to use it because he or she is already working from home anyway?
The key question to ask in these scenarios is whether the reduction in hours/inability to work is caused by the coronavirus pandemic. These are all going to be fact-specific determinations, but if it is an employee’s choice that results in the reduction in hours or inability to work, it seems a stretch to then claim that it is because of the virus.
Can or should we delay approving participant distribution requests until the stock market recovers some of its 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 administratively possible following termination of employment. So, if you intentionally delay processing a distribution request for anything beyond the normal administrative timeframe, 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 impacts 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 (CRD) – which is more broadly available than the hardship. See the next questions and our CARES Act summary for additional information.
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 (CRD), 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.). Qualified Individuals are allowed to treat any withdrawal from their accounts, up to $100,000 from January 1, 2020 through December 30, 2020, as a CRD. That includes any distributions they may have already taken prior to enactment of the new law (but not before January 1, 2020).
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.
Do CRDs qualify for any special tax treatment?
Yes, there are several forms of tax relief related to CRDs:
- Early Withdrawal Penalty The 10% early withdrawal penalty that normally applies to distributions taken prior to age 59 ½ is waived.
- Mandatory Withholding Typically, any cash distribution that is eligible to be rolled over is subject to mandatory federal tax withholding at the time of distribution equal to 20% of the amount distributed. The CARES Act says that for purposes of the withholding rules, a CRD is not treated as being eligible for rollover. That means there is no mandatory 20% withholding, but there is more to it. Instead, CRDs are subject to an optional 10% federal tax withholding. The default is that 10% should be withheld at the time of distribution; however, a participant is eligible to opt-out or to request that a different amount be withheld. That election should be made using IRS Form W-4P. Again, absent a participant’s election, the 10% withholding is the default.
- Spread Tax Over 3 Years Normally, a participant must include a distribution as taxable income in the year it is distributed. For CRDs, participants have the option to claim the entire amount as taxable income in 2020 (the year of distribution) or spread it evenly over three tax years from 2020 – 2022.
Is there any flexibility in how the participant spreads the tax over three years? For example, could a participant claim nothing in 2020 and 2021 and then claim the entire distribution as income in 2022?
No. The law only provides for two options – claim the entire amount as income in 2020 (the year of distribution) or spread it evenly over three years. There is no flexibility to allocate it any other way. It is up to each participant to determine what makes the most sense for his or her situation.
Are CRDs exempt from state tax withholding requirements?
The CARES Act does not provide any relief from state tax withholding requirements. Unless a particular state that normally mandates tax withholding has provided its own relief, those rules continue to apply.
I heard something about repaying CRDs. How does that work?
Even though CRDs are not loans, participants do have the option to repay some or all of a CRD to any plan or IRA that accepts rollover contributions. The window for repayment is three (3) years from the date the participant actually receives the CRD. This repayment option offers two benefits to participants. One is that it allows them to minimize the tax liability in that any portion that is repaid is treated as a rollover and is, therefore, not subject to current tax. The second is that repaying the CRD means that amount will be available for the participant to use in retirement. The participant must attach Form 8915-E to his or her individual income tax return to report any of these re-contributions.
If a participant has to pay taxes on some or all of their CRD for 2020 but they have three years to repay the CRD, how do they recoup the taxes already paid?
The good news from a plan sponsor perspective is that the plan does not have any responsibility for that. Generally, he or she would file an amended tax return for the years affected, but it is up to each participant to work with his or her tax advisor to determine the appropriate course of action, but the short answer is that the participant would need to file amended tax returns for the affected years to claim the tax refund.
There are a lot of moving parts here. Who is responsible to keep up with all of this?
The good news is that you don’t have to do much at all.
- You are able to rely on an employee’s self-certification that he or she is a Qualified Individual
- As long as you don’t approve CRDs of more than $100,000 to any single participant from your plan (or the plans of any companies to which you are legally related), you are not required to confirm a participant hasn’t already taken distributions from other plans or IRAs.
- It is up to each participant to determine how he or she wants to treat a CRD for income tax purposes, including to elect out of the 10% voluntary withholding.
- It is up to each participant to decide whether he or she wants to repay some or all of a CRD.
- Repayments are treated as rollover contributions into your plan, so you aren’t required to ask questions or split out those repayments by money source or anything like that. The only time 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 CRD allowed).
With that said, it is a good idea to notify the plan’s recordkeeper that you are offering CRDs so that they can update their systems and process requests accordingly. Some recordkeepers are automatically turning on CRDs (and other CARES Act relief) unless you opt out, so you might want to check with them to confirm.
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.
That sounds like a lot of additional work on our part at a time when we are scrambling to keep our business going. Not to mention, we do not anticipate laying off employees or reducing anyone's work hours. Are we obligated to offer CRDs to our employees?
As a plan sponsor you are not required to offer CRDs in your plan. That means a participant would have to qualify for a distribution under the “regular” rules. Examples would be termination of employment or, if the plan allows, a hardship distribution or an in-service distribution at age 59 ½.
However, even if your plan does not allow the expanded access via CRDs, a participant can still individually choose to take advantage of the special tax treatment. Consider this example. Joan, one of your former employees who terminated employment in 2018, still has a balance in your plan. Even though you choose not to offer CRDs, Joan can take a distribution due to the fact that she no longer works for you. If Joan is a Qualified Individual and she takes a distribution of her account during 2020, there is no 10% penalty or 20% withholding. She can also choose to spread the tax over 3 years and/or repay the CRD to a new employer’s plan or an IRA.
Can defined benefit plans (including cash balance) offer CRDs?
Sort of. The rules for pension plans (defined benefit plans as well as money purchase pension plans) require a participant to be at least age 59 ½ in order to take an in-service distribution. We won’t bore you with all the reasons, but pension plans that do permit in-service distributions typically set the minimum age at 62. Although the CARES Act effectively overrode those age-based restrictions for 401(k) and 403(b) plans, it did not do so for pension plans. That means DB and MPP plans cannot allow CRDs to participants who are younger than 59 ½ (or age 62, depending on plan provisions); however, if a Qualified Individual is otherwise eligible to take a distribution from a pension plan, he or she can take advantage of the special tax treatment.
We don't presently sponsor a pension plan, but we do have some old accounts that were transferred into our 401(k) plan from the money purchase plan we merged into our 401(k) plan years ago. Can we offer CRDs from those accounts?
Unfortunately, those transferred money purchase accounts are subject to the pension plan restrictions we mention in the previous question. That means, while you are able to offer CRDs from any other plan accounts at any age, a participant must meet one of the other criteria (e.g. age 59 ½, age 62, termination from employment, etc.) in order to access the merged money purchase account.
During other disasters, like Hurricane Katrina, participant loan rules weer 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 taken from March 27, 2020, through September 22, 2020. Only Qualified Individuals are eligible for the increased loan limits.
How Does the CARES Act Expand the Availability of Plan Loans?
The Act has doubled the maximum amount a participant can take as a loan from the plan, to the lesser of $100,000 or 100% of the participant's vested balance. Find out what other loan provisions to keep in mind in this Question of the Week post.
Are we required to offer these higher limits?
No. This provision is completely optional, so you can choose to add it or not. You also have the flexibility to do something in between. For example, you could choose to cap loans at $75,000, although our guess is that going with some sort of “in between” approach like that would be challenging for some recordkeepers to implement from a system perspective. If you choose to make the new limits available in your plan, that will need to be reflected in the amendment at the end of 2022.
Our plan does not presently allow participants to take loans. Can we still offer these CARES Act loans?
A plan must otherwise allow loans in order to take advantage of these new limits. The reason is that the CARES Act does not create a new type of loan; it simply increases the limits that normally apply. If your plan does not already permit loans, you can amend to add that provision. There are several parameters such as interest rate, number of loans available at a time, etc. that you will need to consider as part of the amendment. Even though amendments for the CARES Act are not required until 2022, the deadline to amend your plan to add loans for 2020 is the last day of the 2020 plan year (December 21, 2020 for calendar year plans).
Our plan already allows loans, but we limit participants to no more than one loan outstanding at a time. If a Qualified Individual already has a loan outstanding, can he or she take out another loan under these new limits?
Other than the overall limit, the terms of your plan still apply here. That means a participant who already has a loan would not be able to take out a second loan unless you amend your plan to remove that “one at a time” limitation. Since that is not a change unique to the CARES Act, such an amendment would be required currently (i.e. by the end of the 2020 plan year) and cannot wait until 2022. Similarly, if your plan does not allow a participant to refinance an existing loan to take out more money, you would need to amend your plan to allow for that in this context.
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, for Qualified Individuals, the CARES Act delays the deadline for one year for 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 at the existing interest rate, but the 5-year maximum repayment term for non-residential loans can be extended by up to a year (even if the payment suspension period was shorter than 12 months).
Is There Any Coronavirus Relief for Participants Who Want to Postpone Plan Loan Payments?
In addition to increasing loan limits for those affected by COVID-19, The CARES Act also provides relief for participants with existing loans. Get the details here.
Just to be clear, are you saying that Qualified Individuals don't have to make loan payments for a full year?
Not exactly. This highlights one of the idiosyncrasies of the new law. This relief delays the due date of payments due during the remainder of 2020 for one year, but it does not completely suspend payments for a full year. The best way to explain this is with an example.
Audrey takes out a participant loan on February 1, 2020 and amortizes it over five years (i.e. through January 31, 2025). On July 1, 2020, Audrey self-certifies that she is a Qualified Individual and delays her loan payments. All of her scheduled payments from February 1st through June 30th must have been made on time to keep the loan from going into default. She can then delay any scheduled payments from July 1 through December 31, 2020; however, she must resume payments with the first scheduled payment in January 2021 since only payments through the end of 2020 are eligible to be postponed.
How does the extension of the maximum repayment period work? Can it be extended for a full year if a Qualified Individual only delays six months' worth of payments?
Yes. The maximum repayment period for Qualified Individuals who delay their payments can be extended for a full year, even in a situation like Audrey's (from our example above) where she only delayed six months of payments. What is less clear is whether a participant can choose not to extend the repayment period or to extend it for something less than a full year.
If payments must resume in January, why does the loan relief indicate payments are delayed by a year?
That’s a really good question for which there does not appear to be a really good answer. One school of thought is that the impacted loans must be reamortized as of the first pay date in January 2021 and that the one-year delay is primarily referring to the ability to extend the maximum repayment period for a year (as described above). Another interpretation is that payments must resume according to the current amortization schedule in January 2021 and that the loan is reamortized (including accrued interest) as of the one-year anniversary of the first payment that was delayed.
In Notice 2020-50, the IRS indicated that both of these interpretations are acceptable.
Whose responsibility is it to calculate the accrued interest and reamortize the loans?
In our experience, automated recordkeeping systems have had challenges in re-calculating interest accruals when payments do not line up with the initial amortization schedule (either in amount or timing). With all of the variables and moving parts here, these could end up requiring a lot of manual calculations to get the affected loans up to date and back on track. We will certainly be available to assist with these calculations, and it seems likely that other providers (TPAs, accountants, etc.) will also be available to work with their clients on this project when the time comes.
What if a participant does not want to incur the additional accrued interested? Can he or she choose to continue making loan payments?
This is a little bit of a trick question. Because the delay is only available to Qualified Individuals, someone who wants to continue making payments could simply elect not to provide the self-certification. Without documentation that that individual is a Qualified Individual, there would be no basis to delay payments.
Beyond that (perhaps in a situation where the participant had to self-certify in order to take a CRD), the CARES Act says that the due date of loan payments is delayed, not necessarily the payments themselves. We know…semantics and all that, but it kind of matters here. Saying that the due date (rather than the actual payment) is delayed indicates that the participant is not penalized for missing the payment because the due date for that payment is delayed by a year. It would appear the participant is still allowed to make the regularly scheduled payments; those payments would just now be considered early rather than on time.
You knew this question was coming...is the delay in loan payments mandatory or optional?
This is an optional provision that plans can choose to implement or not. But even though the plan has the option on whether it will implement this change, it appears the tax rules that impact participants are automatic. So regardless of what the plan requires, that would mean a Qualified Individual who does not make scheduled payments from March 27th to December 31st would not get hit with a taxable deemed distribution due to missing those payments.
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 him or her to postpone those payments for up to a year. Many plans require loans to be repaid through payroll deduction unless the loan is being repaid in full in a lump sum. 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 who are 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.
If a participant was already behind in loan payments before March 27th, can he or she use this relief to delay that loan going into default?
No. This relief only applies to loan payments that are otherwise due from March 27, 2020 through the end of the year. If the participant was already behind, then we are talking about payments that were due before March 27th. The participant still has until the end of the regular cure period (the end of the following quarter) to get the loan payments caught up at least through March 27th. He or she could then rely on this relief to postpone the remainder of his or her 2020 loan payments.
Can a Qualified Individual with a defaulted loan treat the deemed distribution as a coronavirus-related distribution?
Yes. If a participant is behind on payments that pre-date March 27th and is not able to cure the delinquency by the end of the cure period, the outstanding balance is treated as a taxable distribution. However, if that person is a Qualified Participant, he or she could treat that deemed loan distribution as a CRD and take advantage of the tax benefits described above, i.e. no 10% penalty, no mandatory withholding, and spread the tax over three years. It appears a participant in this case could also repay the amount of the deemed distribution within three years.
Do employee self-certifications need to be in writing?
The law is silent on the form the certification must take, so we suppose that a verbal certification may technically be acceptable…maybe. However, plan sponsors are generally required to be able to demonstrate that they are operating their plans in a compliant manner. While we hope that IRS auditors will give the benefit of the doubt, there is no guarantee. After all, it is not uncommon for those without the most upstanding of intentions to use a disaster and wide-reaching government relief as cover to attempt transactions that are not permitted. That happened in the aftermath of Hurricane Katrina. That can lead to government auditors taking a hard-line approach to make sure the relief truly went to those for whom it was intended.
Because of that, we strongly suggest that you obtain some sort of written documentation so that you have proof should the plan every be audited. Even a simple email attesting to eligibility is better than no documentation at all. With that said, we are anticipating that many recordkeepers will add a self-certification to distribution forms and websites to ensure things are documented. In the meantime, DWC has prepared a sample employee self-certification form that we are making available to our clients.
It was always my understanding that employment law generally prohibits us from asking employees about their health. Is there an exception here for asking a participant to self-certify that he or she has been diagnosed with COVID-19?
There are differences of opinion on this point. You are absolutely correct that, as a general rule, there are numerous employment-related laws that prohibit employers from asking employees about health conditions. There are some that point to those laws as being absolute and suggesting that it would be a violation to require an employee to disclose a COVID-19 diagnosis. That conclusion supports a more general self-certification in which the employees simply confirm that they meet at least one of the requirements without specifying which one. The sample language the IRS included in Notice 2020-50 takes this approach; however, this is just sample language, not mandatory wording.
Others conclude that because the CARES Act specifically makes this one of the conditions for a participant to be able to take coronavirus-related distribution or qualify for the loan relief, it is acceptable or maybe even mandatory for a company to require the employee to self-certify as to which criteria he or she meets. In further support for this interpretation, some point to the Department of Labor’s temporary regulations related to the paid leave provisions of the Families First Coronavirus Relief Act. (See page 50 of the linked document). It spells out that one of the items an employee must provide in order to be eligible for that relief is documentation of “the COVID-19 qualifying reason for leave.” Since one of the qualifying reasons is being diagnosed, this regulation very clearly contemplates that a diagnosed employee would be required to disclose that.
We are aware of recordkeepers, financial institutions, and attorneys who have come down on both sides of this discussion. That is all a long way of saying that there is no clear, agreed-upon answer here. If you are unsure how to proceed in this regard, please consult your HR or legal counsel.
Can we use the same employee certification for all CARES Act purposes, or do we need to get a separate form if the same participant asks for a second transaction?
Yes, you can use the same self-certification for all of these CARES Act provisions.
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.
I seem to recall that for the first year RMDs are due, the participant actually has until April 1st of the next year to take out the money. How does that work here?
The relief is pretty broad. A participant who is normally required to take his or her first RMD for 2019 has until April 1, 2020 to actually take that distribution. Since that distribution is otherwise due in 2020, it can be waived. If 2020 is the initial RMD year (not due until April 1, 2021), that RMD can also be waived because it is for 2020.
You haven't mentioned "Qualified Individuals." Does that mean this relief applies to everyone?
There is nothing in the CARES Act that says someone has to be a Qualified Individual in order to have his or her RMD waived for 2020.
What if a participant had already taken his or her 2020 RMD before the CARES Act was passed?
Typically, RMDs are not eligible to be rolled over, because the idea is to prevent perpetual tax deferrals. In other words, the rules are in place to make sure retirement accounts are eventually distributed and subjected to income tax. The CARES Act made an exception to that for 2020 RMDs paid out prior to enactment. Any participant in that situation is permitted to rollover that RMD – either back into the same plan or into another employer plan or IRA that accepts rollovers.
You are probably tired of this question...required or optional?
Again, there are some differences of opinion on this, and it is a mixed bag. There are some that interpret it as being mandatory, i.e. that all 2020 RMDs are automatically waived. Others take the position that it is up to each plan sponsor to decide whether or not to waive RMDs from its plan.
We can look to previous IRS guidance for some direction while we await something more current from them. The Worker, Retiree, And Employer Recovery Act of 2008 (WRERA) provided for almost identically worded relief with respect to 2009 RMDs. The IRS provided guidance in Notice 2009-82 that discusses plan sponsor options related to the implementation of that waiver. Based on that and pending any new guidance to the contrary, our interpretation is that plan sponsors have the option with respect to implementing RMD relief.
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.
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.
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.
You mentioned in the introduction that the Small Business Administration's Payroll Protection Program can be used to cover the cost of company-provided retirement benefits. Could you expand on that?
We have seen a number of conflicting interpretations here. We are not experts in the SBA in general or the PPP more specifically. We are basing our interpretation on Q&A number 7 on the FAQ posted to the Treasury Department’s website. If you have any questions about your specific situation, we encourage you to check with your attorney or CPA.
Our employees are really worried about the financial impact this will have on them. Should I continue withholding 401(k) deferrals?
Generally speaking, 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.
With that said, the DOL has provided very limited relief in Disaster Relief Notice 2020-01. In that notice, DOL indicates it will not take enforcement action against plan sponsors for temporary delays in making deposits “solely on the basis of a failure attributable to the COVID-19 outbreak.” The relief is available for the time frame from March 1, 2020 through the 60th day following the end of the national emergency as long as the parties involved “act reasonably, prudently, and in the interest of employees to comply as soon as administratively practicable under the circumstances.”
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. The relief described above only applies to administrative delays. It does not cover a situation in which a plan sponsor intentionally elects to hold employee deferrals to cover cash flow needs.
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.
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 CRDs, 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 Qualified Individuals 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 your plan does have money that is subject to vesting, this is important to watch. Since partial plan terminations look at a series of 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.
Do we have to communicate all of the CARES Act changes to our plan participants?
There is no formal communication requirement in the CARES Act. However, there is a general concept that says any benefits, rights, or features in a plan (not just CARES Act provisions) must be made effectively available to participants on a nondiscriminatory basis. If you do not communicate these new features, it would be difficult to make the case you have made them effectively available. How could a participant take advantage of a new provision if he or she doesn’t know about it?
As a result, it is important to communicate the availability of these new provisions in some form or fashion. We suggest checking with your service providers to see what they might have available for you to use.
This is probably also a good place to add a reminder about electronic disclosure. As a general rule, you are allowed to email plan-related communications to participants using an email address they are required to access as part of their jobs (for reasons beyond just plan disclosures). You can also use personal electronic addresses that participants may have provided to you. For more information on the DOL’s new electronic disclosure rules, click here.
We have some employees who are eligible for our plan who are also eligible to receive paid time off under one of the initial coronavirus relief laws. Does that paid leave count for our retirement plan?
Yes. The PTO provided to employees under the FFCRA is compensation just like any other salary or hourly pay the employees receive, so it is treated just like regular pay for purposes of the retirement plan. That means an employee who has made an election to defer into the 401(k) should have deferrals withheld from that PTO unless/until he or she makes a contrary election. The PTO amounts are also included in compensation when calculating company contributions such as safe harbor contributions, company match, or profit sharing.
Should We Include Government-Mandated Coronavirus PTO When Calculating Company Contributions?
You have participants who qualify for federally mandated paid time off for work missed due to the coronavirus. Are you required to include that pay when calculating company contributions? What about withholding deferrals? Find out in this QOTW.
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.
We have seen a number of service providers send out communications indicating that they will automatically implement all of the CARES Act relief provisions for any plan that does not affirmatively opt-out. Why isn't DWC taking this approach?
This industry has never experienced anything quite like the current environment, and everyone is trying to balance making as much relief as possible available as quickly as possible with the fact that this is still a highly regulated environment. While Congress has made it easy to implement the CARES Act relief right away, there are a number of downstream responsibilities that plan sponsors will have to take on once the dust settles.
The ability to temporarily suspend loan payments provides current relief. The other side of that coin is it will require a lot extra work at the end of this year when all of those loans will require accrued interest calculations and new amortizations to determine the new payment schedules. Not all plan sponsors will want to take on the responsibility of making sure that happens properly and timely. There are also plenty of businesses whose operations are continuing uninterrupted (or even growing). Companies in that situation might not want to make it too easy for their employees to drain their retirement accounts while they are still actively working.
These are some of the reasons that DWC is suggesting not only that companies somehow document their elections now (even though amendments won’t be required until 2022) but also that they engage in conversations with their service providers to understand the downstream implications of their current decisions. It’s not about slowing progress; it is about making sure that unintended consequences do not rear their ugly heads right at the time when many companies will be getting back on their feet.
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.