On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act, otherwise known as the CARES Act, was signed into law. The CARES Act includes provisions which increase flexibility for in-service plan distributions and enhanced loan rules. If selected by the plan sponsor, these optional provisions will give participants impacted by the coronavirus pandemic enhanced access to retirement plan funds. Keep in mind, the coronavirus-related distribution and loan limit increase provisions are optional. Some of the options will not go into effect unless you opt to affirmatively add them to your plan. With that in mind, some recordkeepers may have automatic defaults that plan sponsors should know. Here are some of the highlights that you should be aware of as a sponsor of a retirement plan.
Plans may permit coronavirus-related distributions from a participant’s vested account balance through December 31, 2020.
Coronavirus-Related Loan Relief
Subject to plan approval, there are two types of loan relief provisions in the CARES Act
To be eligible to take a Coronavirus-Related Distribution or loan, the individual participant, or his or her spouse or dependent, must have been diagnosed with COVID-19 or suffered adverse financial consequences due to COVID-19 (e.g., furlough, reduction in hours, unable to work due to childcare, loss of business, etc.) A plan sponsor may rely on a participant’s certification of the above and will not need to ask for proof.
Plans are permitted to implement coronavirus-related distributions and/or enhanced loan provisions immediately clients are asked to, please notify BST & Co. prior to doing so. The deadline to amend plans to include language permitting these distributions is the last day of the plan year beginning on or after January 1, 2022.
Waiver of 2020 Required Minimum Distributions (RMDs)
The CARES Act waives the requirement for any RMD that is required to be paid in 2020. This waiver includes 2019 RMDs which normally would be due by April 1, 2020. Additionally, a 2020 RMD may be rolled over to an IRA or employer plan. The following people would qualify for the waiver:
If you feel the need to reduce or eliminate the employer contributions to your plan, you may be able to do so. Reducing or eliminating nonelective and discretionary matching contributions to a 401(k) plan does not need a plan amendment. However, it’s important to communicate the changes to plan participants. If your profit sharing or matching contribution is discretionary and you haven’t yet filed your 2019 tax return (it is on extension or was originally due 4/15 and automatically extended to 7/15/2020) you can still change your mind and eliminate the discretionary contributions for 2019.
Although it is too late to eliminate 2019 safe harbor contributions, generally, an employer may suspend or reduce safe harbor contributions midyear if they fall under the below two exceptions.
Under both exceptions, employees must receive the supplemental notice, and the suspension or reduction cannot take effect until no earlier than the later of the date the plan is amended or 30 days after the supplemental notice is provided. In addition, employees must have a reasonable opportunity after receipt of the supplemental notice to modify their elective contributions. Finally, the plan must be amended to require the nondiscrimination testing that the safe harbor contributions would have enabled the employer to avoid.
If an employer who desires to suspend or reduce safe harbor contributions in 2020 had not included a statement in this year’s safe harbor notice that the employer was reserving the right to suspend or reduce safe harbor contributions, the employer will be required to rely upon the economic loss exception. For plan years beginning after Dec. 31, 2019, the SECURE Act eliminated the requirement that an employer who makes nonelective safe harbor contributions must disseminate an annual safe harbor notice. Guidance from the IRS will need to be forthcoming as to how this change impacts the ability of an employer to suspend or reduce non-elective safe harbor contributions.
The new rules must be carefully considered in the best interest of the plan and its participants. If you need guidance on how these changes impact your plan or its operating procedures, please contact Jillian Breck at firstname.lastname@example.org or call 518-689-9343.
Posted on April 3, 2020 at 11:12 AM