As many people manage through the changes brought on by the Coronavirus (COVID-19) outbreak, shifting to work-at-home arrangements and while many businesses face potential layoffs in the next few months or longer, it is imperative that retirement plan fiduciaries not allow these conditions to suspend their oversight of the company’s retirement plan. This article looks at the current state of federal legislative relief and some considerations for retirement plan fiduciaries as we wait for announcements from Congress and continue to navigate managing benefit obligations and employee needs during this uncertain business environment.
Legislative relief for retirement plan participants and plan sponsors
These emergency and likely temporary changes would preserve current cash flow to employers to ensure that they can pay workers and continue their businesses.
- Current State: On March 19, Senate Majority Leader Mitch McConnell (R-KY) offered legislation, the Coronavirus, Aid, Relief, and Economic Security (CARES) Act. That bill served as the opening salvo in negotiations that started on March 20 for a third stimulus bill to address the Coronavirus (COVID-19).
- What’s included in the CARES Act:
- Business Relief: Extend tax filing, disclosure, and funding deadlines. Possible contribution funding relief. The organizations further urge Congress to extend federal tax filings due to COVID-19 the same as allowed for by reason of a federally declared disaster, which would also provide relief for employee benefit filings with agencies such as the IRS and DOL. Further, we expect most major retirement recordkeepers to allow a ‘negative election’ adoption of this legislation, meaning, the features will be automatically “added” to the plan and employers will have the option to Opt-Out by a given date.
- Participant Relief: Streamline loan procedures and liberalize hardship withdrawal rules. Congress should allow penalty-free, qualified distributions and loan modifications for individuals impacted by COVID-19 such as:
- doubling the current plan loan limits to the lesser of $100,000 or 100% of the participant’s vested account balance in the plan;
- allowing individuals who borrow from their plan and have a repayment due during the months following the outbreak to delay their loan repayment for up to one year;
- allowing three years to repay income tax associated with a loan default; and
- waiving the 10% penalty on early withdrawals
Coronavirus Check-Up for Retirement Plans
In general, the proposed recommendations address both corporate and individual (such as IRAs) retirement vehicles, which could provide financial assistance to workers who may be unable to work. Below are business considerations related to fiduciary obligations to the company’s retirement participants (active, eligible but not contributing, and terminated).
- Mass Layoffs: In the event a business lays off a substantial percentage of its workforce – even for an intended short period of time – the layoff may trigger a partial plan termination requiring certain immediate vesting. One recurring question is if a furlough impacts employee benefits differently than a traditional layoff/termination.
- Furlough – A furlough is a different way to handle employees during challenging business cycles, like the one happening as a result of the impacts from COVID-19. Rather than using a bona-fide termination, a furlough places an employee in a temporary, non-duty, non-pay status because of lack of work or funds, or other non-disciplinary reasons. This is a type of leave of absence, does not trigger severance of employment in regards to activating a distributable event in a retirement plan. Which also means loan payments follow the plan document’s LOA procedures.
- Participant Withdrawals – We expect many participants will want to tap their 401(k) plan for resources if they experience a loss of income.
- Hardships – For participants who remain employees, the ability to get in-service distributions from their 401(k) plan may be limited other than through hardship withdrawals. Most plans that allow hardship withdrawals follow the IRS safe harbor for deemed and immediate financial need. The current safe harbor provisions do not generally cover COVID-19.
- Plan Loans – Plans will want to review their plan loan policies on addressing loan payments during leaves, including leaves without pay. Moreover, if the loan policy otherwise limits loans (e.g., one loan outstanding), additional loosening of the policy could be considered, but will still be subject to the IRS limits (generally the loans cannot exceed the lesser of 50% of the account balance or $50,000).
- Changing Benefit Formulas – As the
business environment for employers rapidly changes, companies will be
looking at all expenses and alternatives, including reducing employer
contributions, such as the company match.
- Discretionary Contributions: Plan sponsors should look at their plan documents as well as communications to determine if there are restrictions on amending the benefit, or if participants have already met the conditions to receive such a benefit. While more lenient for going on hiatus or full stoppage, employers will still want to review the communications to their employees in the event they need to stop making contributions.
- Safe Harbor Contributions – the ability to reduce or stop contributions mid-year may be restricted, and special rules apply. Safe harbor plans can reduce or suspend employer contributions if the safe harbor notice previously distributed indicated that such contributions could be reduced or suspended, or the employer is operating at an economic loss for the plan year. Moreover, reducing or stopping employer contributions will require a 30-day notice period, during which time employer contributions must continue. Finally, plans that reduce or stop safe harbor contributions must satisfy applicable nondiscrimination testing for the plan year.
- Fiduciary Oversight: As the first quarter of 2020 comes to a close
at the end of March, many businesses may wish to postpone fiduciary
committee meetings. However, especially in highly volatile times, it is
important to maintain oversight of the retirement plan and investment
options. Communication to employees regarding oversight, historical market
returns, and investment choices within the retirement plan are also important
considerations. These may include:
- Investment Education – Financial markets are currently experiencing significant volatility. Some plan fiduciaries are considering additional investment education resources for participants to help them understand and navigate these markets. As a fiduciary, plan sponsors need to be mindful that any investment related materials provide only resources and guidance, but not direct investment advice.
- Payroll Contributions: Even with relief legislation imminent, employers will be required to maintain operational obligations such as timely transmission of employee and employer contributions.
- Nondiscrimination Testing, Retirement Audits, and 5500 Filing: Many retirement plan testing results are delivered in early and mid-March for calendar year plans. Do not ignore these testing results where something may have failed due to employees working from home. Though we anticipate annual testing and filing obligations and deadlines will have some relief in the proposed legislation, these requirements will still need to be satisfied.
Updates are coming through very quickly, and our team continues to monitor the progress for the CARES legislation (and any additional released guidance) closely. We will update this article accordingly as we learn more. If you have questions or need guidance for your retirement plan, please do not hesitate to reach out. In these uncertain times, the most important tool we have is open communication to support each other.
The information and materials on this blog are provided for informational purposes only and are not intended to constitute legal or tax advice. Information provided in this blog may not reflect the most current legal developments and may vary by jurisdiction. The content on this blog is for general informational purposes only and does not apply to any particular facts or circumstances. The use of this blog does not in any way establish an attorney-client relationship, nor should any such relationship be implied, and the contents do not constitute legal or tax advice. If you require legal or tax advice, please consult with a licensed attorney or tax professional in your jurisdiction. The contributing authors expressly disclaim all liability to any persons or entities with respect to any action or inaction based on the contents of this blog.