Various forms of government relief have been issued in an effort to soften the economic impact of COVID-19. As the IRS and Treasury have released guidance governing the implementation of programs like the CARES Act and Paycheck Protection Program (“PPP”) have evolved, the impact on your business’ pension administration has become increasingly clear. This alert is an introduction to the various ways in which you need to adapt in order to remain compliant with the latest legislation and continue to deliver up-to-date and accurate benefits information to your plan participants.
The PPP was designed to deliver federal loans to businesses in need with loans eligible for forgiveness when used for “payroll costs.” Payroll costs include:
- Contributions to employer retirement plans qualify as “payroll costs” as long as they are incurred during the 24-week covered period (borrowers who received their loan before June 5, 2020 may have opted to use the original eight-week covered period, in which case contributions to retirement plans only qualify as “payroll costs” if incurred during those eight weeks).
- After initial uncertainty, IRS guidance confirmed that payroll costs were eligible for forgiveness as long as they were either incurred or paid during the covered period.
- Self-employed individuals are not eligible for the forgiveness of loan funds used to contribute to their retirement plans.
- C-Corp and S-Corp shareholders are eligible for the forgiveness of loan funds contributed to a retirement plan. The terms governing contributions for C- and S-Corp shareholders state that, at a maximum 2.5/12 of a shareholder’s 2019 retirement plan contributions are eligible for forgiveness.
The CARES Act
Beyond introducing the basic framework of the PPP, the CARES Act included other provisions affecting fund sponsors and participants.
- Plan documentation must reflect changes enforced under the CARES Act by the last day of the first plan year beginning on or after Jan. 1 2022. There is an exception for government plans, which have an additional two years to amend their plan documentation.
- Under the CARES Act, sponsors can allow “qualified individuals” to make distributions without penalty. These “coronavirus-related distributions” must be $100,000 or less (in aggregate across all plans) within one taxable year, and be made on or after Jan. 1 2020, or before Dec. 31, 2020. A qualified individual:
--Has been diagnosed with COVID-19 by a test that has been approved by the Center for Disease Control and Prevention (“CDC”);
--Has a spouse or dependent that has been diagnosed by a CDC-approved test;
--Has experienced adverse financial consequences as a result of being quarantined, furloughed, laid off or having hours reduced as a result of COVID-19;
--Is unable to work due to lack of child care resulting from COVID-19;
--Owns or operates a business that closed or has experienced a reduction in hours as a result of COVID-19;
--Qualifies on the basis of other factors that may be determined by the Secretary of the Treasury;
--Has a reduction in pay or self-employed income due to COVID-19, or having a job offer rescinded or job start date delayed due to COVID-19.
- To receive a coronavirus-related distribution, participants must submit to their plan administrator a self-certification confirming that they are a qualified individual with an eligible plan. Eligible plans include:
- The CARES Act does not mention a waiver for the minimum age requirement of 59 ½ associated with money purchase pension plans, defined benefit or cash balance plans to be eligible for an in-service distribution.
- Coronavirus distributions are subject to a federal withholding tax of 10%, which can be waived by the participant. They are not subject to:
--The Internal Revenue Code Section 72(t) early distribution penalty tax of 10%
--The IRC Section 3405 federal tax withholding of 20%.
- Individuals can elect to distribute the income tax incurred as a result of a coronavirus-related distribution over a three-year period. Alternatively, individuals can defer the tax entirely if they repay the distributed amount to an eligible plan within a three-year period. This may require filing amended individual returns.
- Coronavirus-related distributions are entirely separate from hardship withdrawals that may be available to individuals residing or employed in areas designated as a disaster area by FEMA.
Defined Contribution Plan Loans
Participants with defined contribution plans who meet the CARES Act’s definition of a qualified individual may be able to take advantage of the CARES Act’s changes affecting retirement plan loans, including:
- Loans made between March 27, 2020 and Sept. 23, 2020 can have maximum threshholds equal to the lesser of: $100,000, or the greater of $10,000 or 100% of the participant’s current vested account balance.
- Qualified individuals with outstanding loans as of or after March 27, 2020 can suspend loan payments through Dec. 31, 2020, with interest continuing to accrue, and the option to extend the loan period for up to one year without penalty.
- Employers that elect to include a provision for the suspension of 401(k) loan payments may allow employees who have been personally or professionally affected by COVID-19 to defer payments for 1 year before entering default.
- Loan defaults by an individual impacted by the pandemic can be treated a Coronavirus-related distribution.
2020 Minimum Distributions
The CARES Act waives Required Minimum Distribution for defined contribution plans including 401(k), 403(b) and 457 (b) plans, but this waiver does not apply to defined benefit plans.
- RMDs must be taken by April 1 of the year after they turn 72 (or 70 ½ for those who reached 70 ½ before Jan. 1, 2020). Those still working at 72 may delay distribution until retirement, unless they own 5% or more of a company).
- Participants who have already taken an RMD in 2020 may roll that amount into an IRA or qualified plan by the later of August 31, 2020 or within 60 days of the distribution in order to defer tax.
- The RMD waiver also applies to beneficiaries, and does not count against the distribution period requirements established under the SECURE Act and associated with either inherited IRAs or defined contribution plans.
Impact on ADP/ACP Tests
Plan sponsors should be aware that ADP and ACP tests will likely be affected by reduced compensation and deferrals as a result of laid-off and furloughed workers.
Changes to Contributions
Plans that already include language on discretionary nonelective or matching contributions may not require amending for employers to suspend contributions. Plans with fixed or mandatory nonelective and elective contributions will require an amendment to rework fixed contributions on a prospective basis. Contributions that are fixed and mandatory must be made up to the effective date of any amendment, and a notice of the amendment must be issued as a Summary of Material Modifications (SMM) or Summary Plan Description (SPD).
- FollowingIRS notice 2020-52, employers may reduce or suspend safe harbor non-elective contributions as long as the mid-year amendment is adopted between March 13, 2020 and Aug. 31, 2020.
--The supplemental notice associated with an amendment to safe harbor contributions must be issued no later than Aug. 31, 2020.
--The plan amendment must be adopted before the date that the reduction or suspension of the contribution takes effect.
--The supplemental notice relief is only applicable to amendments of non-elective contributions.
- Employers and individuals have until July 15, 2020, plus applicable extensions, to contribute to employer-sponsored retirement plans and IRAs.
Deferral Contributions and Loan Repayments
Plan sponsor remain obligated to depositing participant contributions and loan payments.
- Due no later than the 15th business day after the end of the month in which participants make contributions or have wages withheld. The Department of Labor (“DOL”) has established that this period does not qualify as a safe harbor.
- The DOL expects contributions to be made in a timeframe similar to payroll tax withholdings.
- For retirement plans with 100 or fewer participants, deposits made within seven business days of being withheld will qualify as timely.
- Penalties for failure to make timely contributions could result in lost earning allocations affecting participants and introduce additional disclosure and reporting requirements.
Furloughed employees who are rehired prior to Dec. 31, 2020 will not be considered in connection with a partial plan termination.
Defined Benefits Plans
- The CARES Act delays minimum contributions for single-employer defined benefit plans until Jan. 1, 2021.
- 417(e) rates have dropped to between 2 and 3%.
- Plan sponsors can rescind a plan termination in process by amending the plan, issuing a notice to participants and informing PBGC if the plan termination has already been filed.
- Losses associated with low interest rates can be amortized over several years, increasing pension expense.
The CARES Act and other forms of relief have delivered assistance along with significant administrative requirements to sponsors. If you have any questions about the effects on your plans, sponsors or participants, contact a Benefits21 professional today.