Amidst the global health epidemic caused by the novel coronavirus (‘COVID-19’) and the resulting economic decline in the United States, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law on March 27, 2020 (enactment date). Included in the CARES Act, among many other relief measures, are retirement plan provisions intended to allow participants easier access to their account balances. These provisions are available to participants who self-certify that they meet one of the following criteria:
- Participants, if they themselves, their spouse or their dependent(s) have been diagnosed with COVID-19, or
- Participants who have experienced a heavy financial burden as a result of layoff, furlough, reduction in work hours as an employee, the closing of a participant’s business or reduction in work hours as a business owner, or the inability to work due to lack of child care as a result of COVID-19.
Participant Loans
The CARES Act allows plan sponsors to adopt a provision to allow participants, who meet the above criteria, access to additional retirement funds by increasing the loan limit to the lesser of $100,000 or 100 percent of the participant’s vested balance for loans established up to 180 days from the enactment date (on or before September 23, 2020). Participants with existing loans may choose to defer their loan repayments with a due date from the enactment date through December 31, 2020, for up to one year, and the maturity date of the loan can likewise be extended for the same period as the deferment of loan repayments, up to one year. The loan does, however, continue to accrue interest on the outstanding balance during the deferment period.
Plan sponsors need to ensure that such a participant loan does not become in default during the deferment period.
Coronavirus-Related Distributions (CRDs)
The CARES Act allows plan sponsors to adopt a provision to allow participants who satisfy the above criteria to distribute an amount up to $100,000 before December 31, 2020. These distributions would not be subject to the 10-percent penalty assessed on early withdrawals from an eligible retirement plan. This amount is in addition to other eligible distributions available under the plan such as hardship distributions or other regular in-service distributions.
This amount is an aggregate amount per participant not a per plan amount. An eligible retirement plan for this purpose includes qualified 401(k) plans, IRAs, 403(b) plans and governmental 457(b) plans, but does not include defined benefit plans or money purchase plans. Although the 10-percent penalty will be waived, the participant will still be required to pay the related income tax on the distribution amount, however the tax is permitted to be paid ratably over a three-year period unless the participant elects to include the entire amount in 2020.
Furthermore, the CARES Act permits, but does not require, a participant to redeposit all or a portion of the amount of the distribution back into the plan up until three years from the date of distribution. The plan must allow rollovers, and amounts would not be included in the maximum annual allowable participant contribution into the plan in the year of repayment.
Required Minimum Distributions (RMDs)
For the 2020 calendar year, defined contribution retirement plans’ requirement to process RMDs will be waived to prevent requiring participants to liquidate devalued investments from their participant accounts. This provision is not limited to only those impacted by the coronavirus.
If participants have already received a 2020 RMD they may be eligible to roll over the RMD back into an IRA or other qualified plan. Additional guidance is anticipated to be released on this issue.
Plan Amendments
Regardless of the plan’s current allowable provisions as adopted in their plan document, the CARES Act allows plans to begin administering these relief measures to their participants immediately. The plan document will need to be amended on or before the last day of the first plan year beginning on or after January 1, 2022. For example, if a plan has a plan year end of December 31, then the plan would need to be amended on or before December 31, 2022.
The IRS also granted an additional three-month extension of the remedial amendment period for 403(b) plans originally due on March 31, 2020. The deadline to adopt the restatements on the pre–approved plan documents is now June 30, 2020.
Defined Benefit Plan Contributions
For defined benefit plans, the due date for any required contributions during 2020 has been extended to January 1, 2021. Any required contributions that are deferred beyond the original due date will accrue interest at the plan’s rate of interest. In addition, defined benefit plans will be allowed to use the previous year’s adjusted funding target attainment percentage (AFTAP) for 2020.
Employer Contribution Deadline Extended for Some Employers
The IRS released Notice 2020-18 which provided plan sponsors with a filing deadline of April 15, 2020 (Form 1040 and 1120 filers) an extension until July 15, 2020. The notice also extends the deadline to make employer contributions until July 15, 2020.
Employer Contribution Suspension Considerations
Some plan sponsors may consider suspending their employer contributions (i.e. 401(k) matching, profit sharing, and/or safe-harbor contributions). Some plan documents dictate that the employer contributions are discretionary and, as a result, these employer contributions can be suspended immediately. Should a plan document specify a stated employer contribution rate or formula, the plan sponsor would need to amend the plan document before the last day of the plan year to suspend the employer contributions (and notify participants of the amendment), noting that the plan sponsor must still remit employer contributions that participants have already fulfilled the requirements to receive.
Note that safe harbor plan designs may only be suspended if the “maybe not” language was included in the notice, or if the plan sponsor is operating at an economic loss. The plan sponsor must provide a 30-day notice to plan participants before contributions are suspended. Safe harbor plan sponsors should discuss with their third–party administrators any potential impact on required non-discrimination testing.
Partial Plan Termination Considerations
Plan administrators should also be familiar with the guidelines triggering a partial plan termination. Typically, if a plan sponsor experiences a significant reduction in workforce, the plan sponsor would consider the facts and circumstances to determine if a plan termination has occurred. An industry “rule of thumb” is at least 20 percent or more of the workforce has been involuntarily terminated. Should the plan experience a partial plan termination, the plan would be required to fully vest all affected participants.
Key Takeaways
Plan sponsors will need to be familiar with the above relief measures and quickly determine if they elect to adopt these provisions. Some recordkeepers required an opt out by March 31, 2020 if plan sponsors did not want to provide these updates. Some provisions, such as the extension of loan due dates, will be more challenging for plan sponsors to administer as they will include identifying loans electing the allowed deferment period to prevent reporting defaults in error. Participant communications will need to be prepared and distributed to participants to inform them of any plan changes in conjunction with how they can take advantage of certain provisions.
It is important to note that as the COVID-19 global health epidemic continues, additional relief or changes to the CARES Act could be enacted that may further impact your retirement plans. Your trusted advisors at Sikich stand ready to assist you in navigating these complex and unprecedented circumstances.
About Our Authors
Karen Sanchez, CPA, QPA
Karen is partner-in-charge of Sikich’s employee benefits services team. She leads teams of professionals providing services in the areas of: employee benefit plan audits, third-party administration services for retirement plans, welfare plan Form 5500 preparation, payroll tax compliance issues and Affordable Care Act reporting.
Brent DeMay, CPA
Brent is a partner on Sikich’s accounting and consulting services team with an emphasis in employee benefit plan audits. He is experienced in auditing qualified retirement plans of various sizes sponsored by organizations across industries.
Dana Howell, CPA
Dana is a director in assurance services and a leader on the firm’s ERISA and employee benefit audit team. She is experienced in the management and planning of ERISA audits and Form 5500 filings and has an advanced understanding of ERISA compliance issues and accounting requirements of employee benefit plans.
