Earlier this year, at the end of March, the CARES Act was passed into law with broad legislation around stimulating the economy and providing some stability to businesses, households, and individuals during the COVID-19 health pandemic. Within the CARES Act, there are provisions that impact both companies and organizations that offer retirement plans to their employees. Here, we’ll identify how these changes come into play as we move throughout the year, what these key provisions mean for retirement plans, and the administrative oversight these new provisions necessitate from employers.
Provisions Impacting Employees (With an Employer Catch)
One of the main CARES Act provisions impacting employees involves expanding the ability for individuals to take plan loans or hardship-type distributions if they have been impacted by the COVID-19 health crisis, the latter being a general stipulation that applies to the overwhelming majority of employees. This increase in the loan limitation applies to loans taken on or before September 23, 2020, culminating a 180-day period that began on March 27, 2020. Under this provision, employees have increased loan limits of either 100% of their vested account balance or $100,000 – whichever is less. A unique feature and benefit of these withdrawals is that employees self-certify they have been impacted by the current pandemic, meaning they can more swiftly gain access to funds in their retirement plan. This is a stark contrast to other types of employee plan distributions, like hardship withdrawals, that involve IRS parameters and safe harbors and require employers to assume the responsibility of documenting said IRS standards. For these CARES Act distributions, most of the administrative responsibilities fall on the vendor and the employees themselves, meaning the employer and the company have little to no responsibility.
There is, however, a catch for employers: With these CARES Act-related loans, employees can defer their loan repayments for up to one year for any loan outstanding on or after March 27, 2020 through December 31, 2020. This is one of the first components of the CARES Act the employer is actively involved in administering, and it’s important for employers to take note of this because these loans, by and large for most organizations, are repaid through payroll. If you currently withhold the loan amount from an employee’s paycheck as repayment back to the plan, you now need to track and monitor if and when an employee defers the loan repayment, so you can appropriately trigger the latter. Note that interest still accrues on these loans, but when determining the five-year repayment period and the term of a loan, the period during which the payments are delayed is disregarded.
Provisions Involving Employer Action
In addition to the employer oversight required for CARES Act loan repayments and deferrals, there are several additional important items on the front-end with respect to administration that plan sponsors and fiduciary retirement committee members need to address.
- Most retirement plan vendors require you to amend your plan or sign a letter of direction to enact these CARES Act provisions.
If you have not done so already and if you want to allow your employees to take these types of CARES Act-related distributions, you must amend your company plan to allow for these provisions.
- The CARES Act has waved required minimum distributions (RMDs) for 2020.
If you have key employees like executives or those with ownership of the company who have already reached the age of 70.5 prior to 2020 or who will turn 72 in 2020 – remember, the SECURE Act enacted changes to the RMD-age prompt – they are not required to take distributions this year. This also applies to prior employees who retired but kept their money in your company’s 401(k) or 403(b) plan. In observance of this provision, many retirement plan vendors have automatically waived these distributions for applicable individuals, meaning these RMDs will not be processed for 2020 by default. With this is mind, you will want to be aware of how many employees and retired employees still in your plan normally receive RMDs, and you will want to verify how your vendor is handling this RMD provision to determine if you need to take any actions. Regardless, it is prudent to notify the impacted individuals in your plan to ensure they are aware of this change.
For example, if an employee left your organization a few years ago but still has her account at your 401(k) plan and has been receiving annual RMDs from the account, she may be expecting that annual check in 2020. If your vendor is automatically waiving RMDs, meaning this individual’s RMD will not be processed and sent this year, you want to do your due diligence and let her know about this change. She of course still has the option to take her RMD, and you as an employer or committee member want to make sure you are proactive in communicating that to her, so she knows she needs to contact the vendor to have her 2020 RMD processed. Most of the vendors we work with have said that they are automatically waiving RMDs, reiterating that this is an important item to take note of to ensure you are appropriately communicating this change to your current and former employees who may be unwittingly surprised by the absence of their usual checks.
- On-going administrative and fiduciary compliance are the most important items to be aware of when administering your plan in the age of the CARES Act and this health pandemic.
The Department of Labor (DOL) has the authority to postpone certain compliance deadlines, including when various tax fillings are due like the form 5500, when notices need to go out, and when items like plan loan repayments or excess contributions need to be corrected. As an example, historically, if you are a calendar-year plan, at the end of each calendar year and early part of the following year, you go through year-end compliance testing for the prior year. Currently, as we approach the half-way point of 2020, many retirement plans are finalizing their 2019 year-end compliance testing. While completing this compliance testing, you will want to be aware of any types of excess contributions made through your employees’ payroll. If an employee contributed too much or received too much of a match, you would have had until March 15 to make those corrections and until April 15 to process any refunds to remain compliant; however, given the current environment, these deadlines have been extended out to July 15.
Although this is a reprieve, employers need to act swiftly on these matters, as we are already at the end of May, and most management teams are currently preoccupied with contingency planning and the sustainability of their businesses, resulting in less time allotted for retirement plan administration. Furthermore, the Form 5500 deadline remains the same at July 31 with the usual option to apply for an extension to October 15. The American Retirement Association (ARA) has said it is working with the Department of Labor (DOL) on relief for this deadline; however, for now, it is advisable to operate with the stated deadlines in mind.
As an employer and plan administer, the most important item to keep in mind is that in addition to now having to ration time and attention to some of the nuance components of loans and hardship withdrawals, you still need to ensure your administrative compliance requirements are completed in a timely manner. The ARA continues to work with the DOL to obtain further guidance and relief for retirement plans that will hopefully involve extensions for some of these tax filings, in addition to the removal of safe harbor matches and the cutting of matches without having to terminate your plans altogether, which we discussed in an earlier article. Despite the lack of confirmation on these items, the ARA has been transparent in actively pursuing these initiatives to support companies and organizations throughout these challenging times.