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

(Updated 3/26/20, 4:00pm)

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 proposed by Legislators in recent days 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 proposed by legislators in recent days is recommending specific relief for Hardship Distributions from Qualified Retirement Plans & IRA’s due to Coronavirus. Though at the current time under the IRS safe harbor, hardship withdrawals may only be made for certain categories of enumerated expenses and, therefore, cannot be made solely as a result of a reduction of hours or a furlough. Given the current circumstances, two potentially important safe harbor categories are:

  1. Expenses for medical care for the plan participant and the participant’s primary beneficiary. The IRS defines “primary beneficiary” for this purpose as “an individual who is named as a beneficiary under the plan and has an unconditional right, upon the death of the employee, to all or a portion of the employee’s account balance under the plan.”
  2. Payments necessary to prevent the eviction of an employee from the employee’s principal residence or foreclosure on the mortgage on that residence.

In addition, should FEMA Declare the COVID-19 emergency a Natural “Disaster” (Currently COVID-19 is only considered a National “Emergency”) expanded Hardship withdrawals would be accessible in advance of any legislative action. Please revisit your plans definition of Hardships to ensure proper compliance with your plan document.

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

On Wednesday, March 25th, The United States Senate came to an agreement on the recently introduced CARES act, which is aimed at providing a stimulus package 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 and IRA holders in the form of expanded access to distributions and 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 certain compliance filings and procedures as well as the ability to adopt these emergency provisions, even in cases where the distribution options are not currenty adopted in the plan document.

Though not present in the initial CARES act, the revised version that successfully made its way through the Senate added language granting authority to the DOL to postpone certain compliance deadlines for qualified plans (Form 5500, Deadline to Correct ADP/ACP testing, etc..). The fate of the CARES Act now resides in the House, where the bill is currently being deliberated and is expected to pass in the coming days.

In addition to the administrative relief given to plan sponsors for certain administrative functions, we’ve also provided more detail below on the additional provisions contained in the CARES Act below:

Hardship Distributions

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.

The CARES Act permits those individuals to pay tax on the distributions over a 3-year period, and will also allow for this amount to be contributed back to the plan tax-free on the same 3-year schedule.

Plan Loans

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. 

Plan Amendments

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.  

Temporary Waiver of Required Minimum Distributions

The CARES act also allows for particpants required to take a Required Minimum Distribution in 2020, to omit taking the distribution in 2020 and as such will be held harmless who take advantage of this temporary waiver.  

Defined Benefit 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.  

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 provided by Resources Investment Advisors, LLC, an SEC-registered investment adviser and subsidiary of OneDigital.

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