With the recent passing of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, there are sure to be a lot of questions in what this means for your organization. Encompass is working closely with our partner resources in obtaining as much information as possible to assist you in navigating next steps. One area the CARES Act specifically addresses is around retirement plans. We’ve compiled a few FAQs below to help you understand these provisions and determine next steps. Please note, this information is current as of today, March 31st, and is ever-evolving. The Encompass Group will continue to send updates to keep you informed.
How do we restructure the employer contribution match or suspend our match?
Discretionary Matches:
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Discretionary matches, in general, may be changed. While they may not require notice, it would be in your best interest to provide some form of notice to uphold your reputation with employees.
Safe Harbor Matches:
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Employers who are incurring substantial business hardships may amend to safe harbor contributions. Hardships are defined as: operating at an economic loss, substantial unemployment or underemployment in the employer’s trade or business; and the sales and profits of the employer’s industry are depressed or declining.
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Employers considering reducing or stopping safe harbor contributions should be aware that there are notice requirements related to the change, that contributions must continue until the effective date of the change, and that the plan will be subject to non-discrimination testing for the portion of the year in which it was not a safe harbor plan.
Can we provide access to employee’s plan account balances?
For traditional plan loans prior to the CARES Act, employees may access 50% of the account balance up to $50,000 as a tax-free loan and repayment of the plan loans through salary reductions.
The CARES Act of 2020 contains several retirement plan-related provisions to plan loans including:
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Waiver of 10% tax penalty on withdrawals up to $100,000 for individuals or family members affected by COVID-19 made on or after January 1, 2020. An “affected individual” is someone who is diagnosed with COVID-19; has spouse or dependent diagnosed with COVID-19; experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, had work hours reduced, unable to work due to lack of child care due to COVID-19, closing or reduction in hours of a business owned or operated by the individual due to COVID-19; or experiences other factors as determined by the Treasury Secretary. This list is likely to continue to evolve, so those who may not qualify now may qualify later.
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Allows for the tax to be paid over three years instead of the year of distribution, as well as allowing distributions to be repaid to the plan over three years.
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Increase in the amount available for plan loans of up to $100,000 or 100% of their account balance, whichever is greater. Plans could make this change immediately and amend before the end of the current plan year.
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Those with an outstanding plan loan in repayment or due from the date of enactment of the CARES Act through December 31, 2020, can delay their loan repayment(s) for up to one year.
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Waives the required minimum distribution rules for account holders who are age 70½ or older that are subject to mandatory minimum distributions for certain defined contribution plans and IRAs for calendar year 2020. This provision provides relief to individuals who would otherwise be required to withdraw funds from such retirement accounts during the economic slowdown due to COVID-19.
What are the implications for the plan in the event of a RIF/layoff?
The Internal Revenue Service (IRS) has taken the position that if more than 20% of total plan participants are terminated in a particular year, a partial plan termination may have occurred. The law requires that all “affected employees” be fully vested in their account balances as of the date of the termination. Additionally, they must become 100% vested in all employer contributions regardless of the plan’s vesting schedule.
Affected Employees is generally anyone who left employment for any reason during the plan year in which the partial termination occurred and still has an account balance in the plan, regardless of reason for termination.
What are the fiduciary and administrative considerations we should be taking?
The current environment does not relieve your fiduciary and administrative responsibilities. As a plan administrator, you must still deposit salary deferrals as quickly as possible and administer the plan according to its terms. Additionally, you must ensure only reasonable expenses are paid, while guaranteeing that participants who direct their investments get the information they need to make informed decisions.
Next Steps:
Retirement plans can make amendments and adopt these rules immediately, even if the plan does not currently allow for hardship distributions or loans, provided the plan is amended on or before the last day of the first plan year beginning on or after January 1, 2020, or later if prescribed by the Treasury Secretary.
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Communicate with your service providers prior to any RIF
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Communicate with your employees regarding any changes
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Evaluate whether amendments to your plan may be warranted to provide additional flexibility
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Continue to administer your plan according to its documents and current regulations
The Encompass Group is planning a collaborative webinar related to the effects of the CARES Act on 401(k) and investment strategy. We are also planning a webinar discussing various aspects of the CARES Act on a more comprehensive level. Please be on the lookout for invitations for both in the coming days.
The Encompass Group partners with VisionPoint Advisory Group and The Finway Group to consult on and administer 401(k) for our organization as well as several of our clients. If you’re looking for a solution, please reach out to your Client Experience Manager.