Knowing that many businesses and their employees have been dramatically affected by the effects of COVID-19, we want to provide you with information about some important retirement plan considerations, including information about the CARES Act. Please know that we at TSC stand ready to assist you. We’ve implemented significant remote capabilities so that our staff remains available to answer your questions and take care of your retirement plan needs. Please don’t hesitate to reach out to your TSC consultant with any questions you may have.
Retirement plan considerations related to the CARES Act
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) temporarily provides for new withdrawal options, new and existing loan options, and suspends 2020 Required Minimum Distributions (RMDs) for eligible defined contribution retirement plans. The following summarizes the key retirement provisions of the CARES Act.
Special COVID-19 Withdrawals
The CARES Act permits for the optional provision of “COVID-19-related” distributions of up to $100,000 through December 31, 2020. Importantly, these special distributions are not subject to the normal 10% penalty on early distributions. In addition, the distribution may be repaid at any time over the three-taxable year period that begins on the date the distribution was made. While these distributions are subject to ordinary income tax, individuals may spread out the tax liability over a three-year period beginning with the tax year the distribution occurred. These COVID-19-related distributions are available to “qualified individuals” which are defined as follows:
- Individuals who have been diagnosed with COVID-19 (as confirmed by a CDC-approved test)
- Individuals whose spouse or dependent has been diagnosed with COVID-19
- Individuals who have experienced adverse financial circumstances as a result of being quarantined, furloughed or laid off or having work hours reduced due to COVID-19, being unable to work due to lack of child care due to such virus or disease, closing or reducing of hours of business owned or operated by the individual due to such virus or disease
Employers may rely on the individual’s representations regarding their status as a “qualified Individual” that is eligible for the distribution.
Loan Limit Increases
The CARES Act increases the maximum dollar amount available for loans from $50,000 to $100,000 or 100% of a participant’s vested account balance (if less than $100,000). These new loan limits are available only for loans made by September 23, 2020 and only for qualifying individuals as outlined above.
Payments to outstanding loans for the remainder of 2020 may be delayed for up to one year for qualifying individuals. Interest continues to accrue during the period and the plan can extend the term of the loan for up to one year.
Required Minimum Distributions (RMDs)
RMDs due in 2020 are not required for defined contribution qualified plans (401(k), 403(b), and governmental 457(b)) that adopt the CARES Act provision. This includes 2019 RMDs for which the required beginning date falls in 2020. Note that if an RMD was already processed in 2020, then the participant is permitted to roll it back into the plan or into an IRA. It is worth noting that this provision does not apply to defined benefit and cash balance plans.
Adoption and Application of the CARES Act Provisions
TSC plans to provide a sponsor level amendment to all of its clients’ plans to include the provisions of the CARES Act so that there is nothing its clients need to do should they want to take advantage of these new temporary provisions. However, the actual amendment doesn’t need to be adopted before 2022. Clients that do not want to include the new COVID-19 withdrawals and the increased loan limit provisions should notify their TSC consultant.
Tools and Resources
Retirement Plan Considerations Regarding Paycheck Protection Program Loans
In addition to several new retirement plan-specific distribution and loan provisions, the CARES Act also created the Paycheck Protection Program (PPP) to help small employers deal with the economic impacts associated with COVID-19. While the details of the PPP are beyond the scope of this commentary, in essence, it authorized potentially forgivable loans intended to cover certain expenses, including payroll costs and employee benefits. The PPP provides that these funds may be used to pay retirement benefits; however, there appears to be limited guidance regarding the specific type or amount of contributions covered. While we at TSC are happy to help employers determine what type and amount of contributions are permitted under the terms of their plan, we are not in a position to provide guidance regarding whether or not a specific contribution meets the PPP requirements for loan forgiveness. Only the employer’s legal counsel, tax advisor, or lender can assist them with those issues. However, to assist with this analysis, here are several important things employers may want to consider:
- While the language “payment of any retirement benefit” appears quite broad, it is possible that future regulatory guidance will limit this to payments made as part of an employer’s normal payroll and benefits costs for the applicable period. If the employer normally makes retirement plan contributions at the end of the plan year, it is not clear if it is permissible to take credit for contributions before that time. Again, TSC is not in a position to tell employers whether any retirement plan contributions made during the applicable period are acceptable retirement benefits within the meaning of the PPP.
- Should employers choose to make retirement contributions now, before they are normally contributed and allocated under the terms of the plan, we believe they should be made uniformly for all plan participants (for example, as a pro-rata percentage of year-to-date compensation). Making contributions in a non-uniform manner may be deemed to be discriminatory and could jeopardize the tax-qualified status of the plan.
- Any contributions made now must be included in year-end compliance testing. This means that adjustments and additional “true-up” contributions may be required. Unfortunately, it may be very difficult to predict necessary adjustments until year-end compliance testing has been completed.
- If an employer’s plan utilizes provisions requiring participants to be employed at the end of the plan year or to work a requisite number of hours during the plan year in order to receive an allocation of the employer-provided contribution, we strongly discourage them from making contributions before the end of the current plan year. Making contributions to a participant who does not ultimately satisfy those allocation requirements may violate the terms of the plan and could jeopardize the tax-qualified status of the plan. At a minimum, the employer would be required to correct the violation by recovering the funds from the participant.
The considerations mentioned above are not exhaustive list. Again, we encourage employers to seek the advice of their legal counsel, tax advisor, or lender for specific guidance.
General retirement plan considerations related to COVID-19
Safe harbor cessation
If your plan contains employer safe harbor contribution features, you may prospectively cease these contributions via a plan amendment 30 days after distributing the proper notice to employees. Note that removing safe harbor contributions will cause the plan to be subject to ADP/ACP testing which could result in refunds of excess contributions to owners and other highly compensated employees. In addition, if the plan is determined to be top-heavy (60% or more of total plan assets are attributable to owners and other key employees), a 3% minimum top-heavy contribution may still be required for non-key employees.
If your plan has a discretionary match that is not specifically outlined in your plan document, you can modify or cease making these contributions at any time. It does not require an amendment to your plan.
Suspension of employer contributions versus plan termination
If you are considering terminating your plan entirely, you may want to consider simply suspending employer contributions instead. Terminating the plan in its entirety would result in restrictions on adopting another plan in the future and would require immediate full vesting for all participants. If you are considering terminating your plan, please contact us to discuss all of your options so that you can make an informed decision.
Cash balance and defined benefit plans
If you sponsor a cash balance or defined benefit plan and are concerned about your ability to fund future contributions, we strongly urge you to consult with your financial advisor and accountant to determine if reducing or freezing the benefit formula is necessary. For most plans, decreasing or freezing the formula must be done before any participant works 1,000 hours (only if the plan has a 1,000 hour accrual requirement). In order to reduce or freeze your cash balance or defined benefit plan formula, the plan must be amended prior to the effective date and employees must be notified at least 15 days in advance of the freeze.
Contribution Deposit Deadline
The IRS has delayed the April 15, 2020 tax filing deadline to July 15, 2020. This means that plan contributions that were originally due by April 15, 2020 were extended to July 15, 2020.