The coronavirus pandemic has had significant and ongoing impacts on the economy. Many businesses are feeling the effects and are looking for ways to continue to operate effectively in a very challenging environment. The recently passed CARES (Coronavirus Aid, Relief, and Economic Security) Act has provisions for business assistance, enhanced unemployment benefits as well as flexibility for employees with their retirement plan balances. Both employers and plan participants may look to the plan for relief, and sponsors should be aware of options that they have and the considerations of making changes to the plan.
All expenses will be evaluated as companies deal with the rapidly changing business environment, including employer contributions to the retirement plan. The flexibility of reducing or eliminating the employer contribution will depend on the type of contribution that is defined in the plan document.
- Discretionary Contributions
Changing or eliminating discretionary non-elective or match contributions is relatively simple since a plan amendment, or official participant notices, are not required. The change is more of an administrative procedure. The primary concerns are communicating the change to employees, and will employees change their contributions to the point that it affects nondiscrimination testing.
- Safe Harbor Contributions
A plan that makes a safe harbor contribution is deemed to pass nondiscrimination testing. Generally, plans cannot change their safe harbor contribution mid-year, but there are two exceptions. One is for companies that are operating at an “economic loss”. The other exception is for plans that included a statement in the annual safe harbor notice distributed to employees that states the plan may be amended in the upcoming year to reduce or suspend the safe harbor contributions.
In both scenarios, the plan needs to notify employees with a notice of the change. The plan must also give employees an opportunity to change their contribution election. Keep in mind, if the safe harbor contribution is removed, the plan is now subject to nondiscrimination testing and employees deemed “highly compensated” may face a limitation on their ability to contribute to the plan.
- Non-Safe Harbor Mandatory Contributions
Some plans have a non-elective or matching contribution that is defined in the plan document as a certain percentage or amount. This can be modified with an amendment to the plan. Considerations of making a change are the employer contribution must still be made until the plan amendment is effective, and it could impact nondiscrimination testing if employees reduce their contributions.
Some participants will seek a withdrawal from their retirement plan if they have a need for income. For those that are still employed, their ability to take money from the plan will be governed by plan rules for in-service and/or hardship withdrawals.
Relaxing existing in-service withdrawal requirements or adding the provision to the plan are options. But once added, they can be difficult to remove and allowing withdrawals during relative low points for markets and participant balances should be carefully considered.
The CARES Act allows withdrawals for those that have a financial need due to the effects of COVID-19. To be eligible, the individual participant, his or her spouse or dependent, must have been diagnosed with COVID-19, or the individual suffered adverse financial consequences due to COVID-19 (furlough, reduction in hours, unable to work due to childcare, loss of business, etc.). Withdrawals up to $100,000 related to coronavirus expenses can be taken between January 1, 2020 and December 31, 2020. Qualified distributions are exempt from the mandatory 20% withholding and the 10% early withdrawal penalty. These withdrawals are still subject to taxation, but it can be spread over 3 years. It also allows for repayment of the withdrawal to a qualified plan over a 3-year period to avoid taxation.
Retirement Plan Loans
Many retirement plans allow participants to borrow against their plan balance. These loans are amortized up to 5 years and repaid through payroll deductions. If the loan is not repaid on schedule, the remaining balance is deemed a taxable distribution. If the participant is under the age of 59 1/2, they can be subject to an additional 10% penalty for early withdrawal.
Outstanding retirement plan loans are an issue to be aware of as businesses face the need to furlough employees. Generally, employees that are on unpaid leave do not have to make their scheduled loan repayments as long as the period of unemployment is no longer than one year, and the loan is repaid by the end of the original term of the loan. The missed repayments can be repaid at the end of the loan’s term or by increasing the repayment amount during the remaining repayment period once the employee returns to work.
The CARES Act added a provision for outstanding loans that allows scheduled repayments from March 27, 2020 through December 31, 2020 to be delayed for up to a year, with plan approval. Interest would continue to accrue, and the plan can extend the term of the loan for up to a year.
Another provision of the act increases the limit on a retirement plan loan from $50,000 or 50% of the vested account balance to $100,000 or 100% of the vested balance. The loan would have to be taken within 180 days of passage of the act, by September 23, 2020, and repayments can be delayed up to a year. To take advantage of the new loan provisions, employees must meet the same criteria as for withdrawals.
Required Minimum Distribution
Required minimum distributions are suspended for 2020. This includes retirement plans, IRAs as well as inherited IRAs.
Employees are seeing volatility in financial markets and to their retirement accounts that they haven’t experienced in some time. This naturally brings unease, worry and questions on what action, if any, they should take. Additional education resources should be considered to meet the needs of employees.
How changes to any of these aspects of your retirement plan or the additional resources of the CARES Act could impact your business and employees will depend, in part, on the current provisions in your plan document. Plans can start to use the recently passed provisions immediately but will have to amend the plan generally no later than the last day of the first plan year beginning on or after January 1, 2022.
If you would like to review your plan, discuss the CARES Act or other potential changes to plan that may help during these unprecedented times, do not hesitate to reach out. We are here to make sure your plan is set up to meet the needs of your business and your employees.