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Cost Saving Measures for Company-Sponsored Retirement Plans + CARES Act Update

(Updated 3/30/20, 5:00pm)

The Coronavirus (COVID-19) pandemic is leaving employers and their employees with questions regarding the impact on their company-sponsored retirement plans. Reference these commonly asked questions to discover how the pandemic is influencing new plan regulations and discover practical cost-saving measures for cost containment during this time.

Can a business change or stop company contribution to employees’ retirement plans?

Discretionary Match

If your company has a “discretionary” match, you can change the formula at any point including stopping the match. Such change does not require any participant notice though managing the message is still a critical component of your plan.

Stated Match

If your plan’s adoption agreement has a specific formula, it can be amended to either a discretionary or revised though will require both the amendment and a notice to your employees. This process can take 30 to 60 days depending upon your provider and required notification to your employees.

Safe Harbor Match

Safe Harbor match formulas can also be removed from the plan, though these also require plan amendments and notification to employees. This process can take 30 to 60 days depending upon your provider and required notification to your employees.

If a business changes the match or employer contribution to a retirement plan, what other ramifications should be considered?

  1. If your match is calculated by your payroll provider, please be sure to update any formula or contact your payroll provider for assistance.
  2. If your plan is current Safe Harbor, this maneuver will require the plan to complete non-discrimination testing for the plan year. If the safe harbor contributions already allocated, it can be considered for non-discrimination testing purposes.
  3. While changing a match formula is allowed, it is important to consider the messaging to your team members as saving for their future should continue even without any company contribution.

What additional options do employers have with regard to reducing cost to company-sponsored retirement plans?

Forfeiture Utilization

Be sure to use all company forfeitures to fund plan expenses in the current year.

Revisit your small balance force out provisions

Many plans have the ability to recoup unvested match or profit-sharing dollars to terminated employees. Unvested monies in participant accounts only move to the forfeiture account upon a distributable event. Using the “force out” mechanism for small balances (terminated under $5000) will help move these dollars into the forfeiture account so that you can offset plan expense or future company contributions.

Plan Audit

Should your plan be subject to this annual requirement, considering passing the cost onto the plan to reduce company expenses.

What is the impact to retirement plans should a business need to terminate or furlough employees?

A partial plan termination is determined after the end of the year if your eligible population changes by 20% or more. As such, the impacted population would have an accelerated vesting event meaning this group would be 100% vested rather than follow any vesting schedule in place.

Please note, the above commentary is a general guideline. Consult your individual plan document or contact your record-keeper for additional information.

Is a furloughed employee eligible for a distribution from a retirement plan?

While this can be considered a “grey area” in the IRS regulations regarding Retirement Plans & furloughs. Generally speaking, a furlough is not considered a separation of service or a distributable event especially if there is an expectation that the employee will return in the future should conditions improve.  This type of determination may require the assistance of ERISA counsel.

What impact does a furlough have on participant loans?

Employers have already begun to furlough employees as opposed to terminating employment. IRS regulations discuss the impact that a furlough has on participant loan requirements. Employees with plan loans who are placed on unpaid leave of absence may forego making loan payments during the leave of absence without triggering taxation of the loan as long as the following requirements are met:

  1. The furlough cannot exceed 1 year
  2. The loan must be repaid by the end of the original term of the loan. The missed payments that occurred during the furlough can be later repaid by continuing the original payment schedule, with a larger balloon payment of the missed installments at the end of the original loan term, or by increasing the payments upon reinstatement during the remainder of the loan repayment period. Please note, special consideration should go into examining a participant case where the furlough begins in extreme proximity to the end of the original loan term.

The CARES act, passed on 3/27/2020, contains provisions to expand the availability of loans & provide repayment relief due to COVID-19.

Does the COVID-19 National Emergency qualify as a hardship?

The CARES Act passed by legislators on Friday, March 27th created a new form of Hardship Distribution from Qualified Retirement Plans & IRA’s due to Coronavirus outbreak. The Coronavirus Related Distribution (“CRD”) became available to participants in a qualified retirement plan that adopted these provisions effective immediately and provide the lesser of; up to 100% or $100,000 of a participants vested account balance for COVID-19 Related Hardships. A Qualified Individual is someone who:

  1. is diagnosed with Coronavirus/COVID-19;
  2. whose spouse or child/dependent is diagnosed with Coronavirus/COVID-19;
  3. who has a financial hardship as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19.

As we’ve seen in the past for FEMA Disaster related hardship distribution, the 10% penalty is waived for qualified individuals and payment of income taxes owed can be made ratably on a 3-year schedule. Similarly, a participant may make tax free repayment contributions back to their qualified plan over this same three period above the qualified plan limits for that given year. A Coronavirus related distribution must be taken by December 31st, 2020 and participants may retroactively treat any distribution taken from January 1st, 2020 as a CRD.

Coronavirus, Aid, Relief, and Economic Security (CARES) Act

*Updated 3/27/2020 5pm
On Friday, March 27th, 2020 President Trump signed the CARES act putting into effect the largest stimulus package in United States history. The bill is aimed at providing a boost to the struggling US Economy as a result of the COVID-19 outbreak. In addition, a portion of the legislation provides immediate relief to retirement plan participants & IRA holders in the form of expanded access to distributions & loans due to hardships caused by the COVID-19 outbreak.

The legislation also provides for administrative relief for certain qualified plan sponsors in regard to required filings & procedures. The legislation also allows for organizations who currently do not offer these types of distribution options within their plan document the ability to immediately adopt these provisions.

See below for additional details on the key provisions that impact Qualified Retirement Plans below:

Hardship Distributions

(See Sec. 2202: Special Rules for Use of Retirement Funds.)
The CARES Act waives the additional 10% tax/penalty on early withdrawals from a Qualified Retirement plan or IRA up to $100,000 for a participant who:

  1. is diagnosed with Coronavirus/COVID-19;
  2. whose spouse or child/dependent is diagnosed with Coronavirus/COVID-19;
  3. who has a financial hardship as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or
  4. other factors as determined by the Treasury Secretary.

These distributions will not be subject to the 20% mandatory withholding and the special tax notice requirement (402(f)) will not apply.

In addition, the CARES Act permits those individuals who take a hardship under these conditions to pay the tax owed on these distributions over a 3-year period. The bill also allows for these amounts to be contributed back to the plan tax-free on the same 3-year schedule. The CARES act will also allow for a plan administrator to rely on “self-certification” of these hardship conditions by participants.

Plan Loans

(See Sec. 2202: Special Rules for Use of Retirement Funds.)
The CARES Act doubles the current retirement plan loan limits to the lesser of $100,000 or 100% of the participant’s vested account balance in the plan. Individuals with an outstanding loan from their plan with a repayment due from the date of enactment of the CARES Act through Dec. 31, 2020, can delay their loan repayment(s) for up to one year.

Temporary Waiver of Required Minimum Distributions

(See Sec. 2203: Temporary Waiver of Required Minimum Distribution Rules for Certain Retirement Plans and Accounts.)
The CARES act also allows for participants required to take a Required Minimum Distribution in 2020, to omit taking the distribution in 2020 and as such individuals will be held harmless who take advantage of this temporary waiver from a taxation standpoint.

Defined Benefit Plan Funding Rules

(See Sec. 3608: Single Employer Plan Funding Rules.)
A new addition to the bill is a provision aimed at providing a delay in required funding for companies who sponsor a defined benefit plan. The provision grants a sponsor of a defined benefit plan the ability to delay any contribtion otherwise due in 2020 until January 1st, 2021. On January 1st of 2021, the contributions would be due with accrued interest.

A provision was also included to grant plan sponsors of defined benefit plans relief from distribution restrictions due to a lack of funding/contributions during this challenging economic environment. A sponsor may rely on their plan’s status for benefit restrictions as of December 31st, 2019 to guide distribution restrictions throughout 2020.

Plan Amendments

(See Sec. 2202: Special Rules for Use of Retirement Funds.)
Retirement plans can adopt these rules immediately, even if your plan does not currently allow hardship distributions or loans, provided the plan is amended on or before the last day of the first plan year beginning on or after Jan. 1, 2020, or later if prescribed by the Treasury Secretary.

Expanded Department of Labor Authority to Postpone Certain Deadlines Under ERISA

(See Sec. 3607: Expansion of DOL Authority to postpone certain deadlines.)
The CARES act expands the Department of Labor’s authority to postpone certain requirements & deadlines under ERISA (i.e. Form 5500 Filings, Deadlines for ADP/ACP Testing Refunds, Distribution of excess aggregate contributions, etc..) during a public health crisis. While the legislation itself does not immediately provide for these postponements, it is expected that the DOL will use their expanded authority to provide relief for these administrative requirements in the days to follow the passage of CARES.

For more information on the important steps businesses should take during this uncertain time, visit our OneDigital Coronavirus Advisory Hub, or reach out to your local OneDigital advisory team.

Investment Advice offered through Resources Investment Advisors LLC, (d/b/a OneDigital Investment Advisors) an SEC-registered investment adviser and wholly owned subsidiary of OneDigital.