The novel coronavirus pandemic has disrupted every facet of a company’s operations. In addition to urgent decisions regarding a company’s workforce, company leadership must also consider how the pandemic and related fallout on its employees’ personal finances affects the operation of its retirement plans. For example, plan participants may need immediate access to their retirement plan accounts to cover expenses arising from COVID-19 related workplace closures or plan fiduciaries may be concerned that the large losses in their plan’s investments, resulting from current market volatility, will lead to participants bringing breach of fiduciary duty claims.
Congress has provided some relief to tax-qualified plans as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on Friday, March 27, 2020. The CARES Act offers new ways for defined contribution retirement plan participants to withdraw funds from their accounts in order to pay COVID-19-related expenses, if their employer elects to opt into these provisions.
This Alert summarizes the key changes to qualified retirement plans under the CARES Act and suggests best practices for plan fiduciaries to minimize the risk of breaching their fiduciary duties. With respect to CARES Act provisions summarized below, the devil is in the details, and a company should consult with its ERISA counsel to analyze which of these changes are best suited to its plans and employee needs.
RETIREMENT PLAN RELIEF UNDER THE CARES ACT
New Distribution Option: The CARES Act creates a new form of in-service distribution for participants affected by COVID-19. The “coronavirus-related distribution” (“CRD”) may be made to Qualified Individuals (defined below) between January 1, 2020 through December 31, 2020 , and: (i) is not subject to the 10% early distribution penalty under Code Section 72(t) (but is still subject to ordinary income tax), (ii) may be repaid to the plan over a three-year period, and (iii) is taken into ordinary income by the recipient over a three-year period to the extent that it is not repaid. Distributions may not exceed $100,000 per eligible participant. Because CRDs are not eligible rollover distributions, they are not subject to the 20% mandatory withholding on such distributions. Instead, CRDs are subject to 10% withholding that is waivable by participants. (Note: participants must be provided a notice that they can waive the withholding, because failure to do so can subject the plan sponsor to a $100 penalty per participant, up to a maximum of $50,000 under the SECURE Act). This distribution option is not required to be offered by plan sponsors.
Plan Loan Changes: Qualified Individuals may receive increased plan loans in an amount not to exceed the lesser of $100,000 (up from the current $50,000 limit) or 100% (up from the current 50% limit) of the participant’s vested account balance. In addition, any plan loan payment of a Qualified Individual that comes due during the period beginning with the passage of the CARES Act and ending December 31, 2020 will be delayed for an additional year. (Note: plan sponsors and service providers should take care to ensure that participant loans are not reported on Form 1099-R as in default during this extended repayment period). Subsequent loan payments must be re-amortized to reflect the delay and any interest that accrues during the delay.
Waiver of 2020 Required Minimum Distribution: The CARES Act provides a waiver of any required minimum distributions that otherwise would have been due in 2020. This relief applies to qualified retirement plans (such as 401(k) plans), Code Section 403(a) and 403(b) plans, and governmental Code Section 457(b) plans. Comment: this guidance is beneficial because it allows affected participants to delay liquidating deflated investments during this period and allows time for the investments to recover some value.
A “Qualified Individual” includes a participant: (i) who is diagnosed with COVID-19; (ii) whose spouse or dependent is diagnosed with COVID-19; or (iii) who experiences adverse financial consequences as a result of being quarantined, laid off or furloughed, having work hours reduced due to COVID-19, being unable to work due to an absence of child care caused by COVID-19, the closing of a business as a result of COVID-19, or other factors identified by the Secretary of the Treasury. The plan administrator can rely on a participant’s certification that he or she satisfies any of these criteria.
Updating Plan Documents and Participant Communications: Historically, plans are required to be amended in the year an optional provision becomes effective. Under the CARES Act, however, plans will have until the end of the plan year beginning on or after January 1, 2022 to adopt plan amendments related to this relief (though notices to participants should be distributed sooner). The amendment must be retroactively effective and match how the plan was administered in the interim.
Single Employer Defined Benefit Plan Funding Delay: The due date for any required contributions to defined benefit plans (including quarterly contributions) during 2020 is extended to January 1, 2021 but must be increased by the plan’s rate of interest for the interim period. Additionally, the plan sponsor is permitted to consider the AFTAP for the 2020 plan year to be the same as it was for the prior plan year.
FIDUCIARY CONSIDERATIONS FOR PLAN SPONSORS
ERISA claims seeking recovery of investment losses tend to proliferate during times of market volatility. This is likely to hold true with respect to the coronavirus pandemic since it has already had a very disruptive impact on financial markets. The best way for plan fiduciaries to insulate against this risk is to periodically review plan and service provider performance and document its rationale for any resulting decisions. In addition, we have suggested some fiduciary best practices below:
Continue to Monitor Plan Investment and Service Providers: Plan fiduciaries should continue to monitor their plan’s investments and service providers. It is particularly important to continue to hold plan committee meetings, even if doing so remotely.
Monitoring Plan Investments:
- Review the plan’s investment policy statement and make sure that you are following its outlined processes.
- Work closely with plan advisors to determine if any investment changes need to be made at this time.
- Best Practice – Plan fiduciaries should review the plan’s investments in light of the volatility resulting from the coronavirus pandemic. Here are some suggestions that should be discussed with the plan’s investment advisor:
- Stable Value Funds. Plan fiduciaries should review their capital preservation investment options (including stable value funds) in light of the recent volatility to determine whether they still serve their capital preservation objectives.
- Alternative Investments. If the plan offers alternative investments, plan fiduciaries should carefully develop a clear record of the rationale for maintaining these investments and communicate that rationale in participant communications.
- Actively Managed Funds. If not already doing so, plan fiduciaries should consider offering a mix of actively managed funds and index funds in the same market sector. Depending on their investment philosophy or market sectors, actively managed funds may outperform index funds in these volatile times.
Monitor Participant Actions and Communicate with Participants: Plan fiduciaries should work with the plan’s recordkeeper to monitor changes in participant deferrals or investments in their accounts. This information will be helpful in establishing the need for communication with your participants. In addition, plan fiduciaries should consider letting plan participants know that they are actively monitoring the plan’s investments and services to reassure participants that the plan fiduciaries are paying attention to the plan and its investments.
Other Coronavirus-Related Issues
Employer Contributions to Retirement Plans: Some companies may be interested in delaying, reducing or suspending employer contributions to their retirement plan temporarily to improve the company’s short-term cash position. The plan document will describe the timing by which employer contributions have to be deposited into the plan, and, if permitted by the plan document, employer contributions can be delayed until the end of the stated time period. Whether the employer contributions can be reduced or suspended prospectively, will depend on the type of employer contribution.
- For non-safe harbor matching contributions or profit-sharing contributions, the plan sponsor typically retains the discretion to decide whether to make a contribution. However, under the normal anti-cutback rules, once participants have fulfilled the requirements to get a contribution, the contribution is required.
- For safe-harbor matching contributions, the plan sponsor cannot reduce or suspend contributions unless either (i) the plan provided a safe harbor notice containing language reserving the plan sponsor’s right to reduce or suspend contributions; or (ii) the plan sponsor is operating at an economic loss for the plan year. If the contribution is suspended, participants must be given a 30-day advance notice of the impending suspension (and the employer contribution requirements continue to apply for that 30-day period), and the plan must pass ADP and top-heavy testing for the plan year.
Note: The CARES Act also includes a Paycheck Protection Program, which is meant to help small businesses (fewer than 500 employees) impacted by the pandemic and economic downturn to make payroll and cover other expenses from February 15, 2020 to June 30, 2020. Notably, allowable payroll expenses include retirement plan contributions. This is an option some companies can consider to assist with their retirement plan employer contribution obligations through June 30, 2020.
Finally, a bit of good news. The IRS affirmed in IR-2020-59 (published March 25, 2020) that, absent extenuating circumstances, it will not be initiating any new audits or examinations from April 1, 2020 through July 15, 2020. The IRS will, however, start new examinations where deemed necessary to protect the government’s interest in preserving the applicable statute of limitations.
If you have any questions, feel free to call (919-781-4000) or e-mail your Wyrick Robbins contact or Gray Hutchison (email@example.com) or San Parikh (firstname.lastname@example.org) of our Employee Benefits & Executive Compensation practice group.
NOTICE: This Alert provides merely an overview and summary information regarding the relevant qualified retirement plan considerations in the COVID-19 era and is not written advice directed at the particular facts and circumstances of any person or company. Please note that not all potential details and nuances regarding these requirements and changes to law have been addressed, and this Alert does not involve analysis of specific facts concerning any specific company or reach any conclusion regarding employee benefits issues for any specific individual or company. If you are interested in the subject of this Alert, we encourage you to contact us or your legal counsel to discuss the potential application to your situation.