FAQ’s from Plan Sponsors regarding the CARES Act – Other Items

On March 27, 2020 the President signed the Coronavirus, Aid, Relief, and Economic Security (CARES) Act into law. This legislation provides relief for those suffering financially and physically from the COVID-19 pandemic.  With respect to retirement plans, the CARES Act provides targeted relief for plan participants who need access to their retirement plan funds through loans or distributions, waives required minimum distributions for the 2020 calendar year for most plans, and provides funding relief for employers who sponsor single-employer defined benefit plans, and provides emergency funds for small employers who retain their employees through a loan program called the Payroll Protection Program (PPP).

This is the third and final in a series to address questions most frequently being asked by 401(k) plan sponsors related to the CARES Act, specifically focusing on other miscellaneous items under the Act.

Our business model has not been affected; we are still at full capacity. Why should we offer the Coronavirus-related Loans and Distributions?

Although there are several industries that are not adversely affected, most Americans are facing some degree of financial uncertainty due to the Coronavirus pandemic. One of your employees may have a spouse that has been diagnosed, who has no access to a retirement plan or additional funds. Hopefully not, but if they do, this is a way to support the affected participants at no cost to the plan.

How will my 401(k) Investment Platform handle the Coronavirus-related Loans and Distributions?

Each Platform is different. Some of our vendor partners are taking an “Opt-out” approach, meaning the provisions will automatically apply unless the Plan Sponsor states specifically that they do not want them to. Keep in mind, although the Platform can amend their Contract, they cannot amend the Plan without Plan Sponsor action. We will be working directly with our Plan Sponsors to solidify their desired positions in writing.

Our 401(k) Investment Platform does not allow Coronavirus Distributions to former employees, but the CARES Act say’s both current and former employees may take a Coronavirus-related Distribution. How do we proceed?

Again, each Platform is different. The bottom line is that although the Act provides for certain things, investment platforms have systems in place that have evolved over the years to handle transactions in a particular manner. Some of our vendors cannot undergo the large task of changing these systems for what they perceive as a relatively short period of time, mainly through September or the end of the year at most. If a terminated participant meets the criteria of a Qualified Individual, they always have the option of rolling the funds over to an IRA and taking a Coronavirus-related distribution from the IRA, thus avoiding the 20% mandatory withholding.

What is the waiver of Required Minimum Distributions under the CARES Act for 2020?

The CARES Act waives required minimum distributions (RMDs) otherwise required to be made in 2020 for defined contribution plans, 403(b) plans, governmental 457(b) plans, and IRAs. The waiver does not apply to defined benefit plans (including cash balance plans). Additionally, if an RMD has already been paid this year, the CARES Act provides participants with the opportunity to “repay” that distribution as a rollover to a qualified plan or IRA to avoid current taxation.

Does this apply to participants whose required beginning date was April 1, 2020 for their first RMD?

It depends. Remember, the first RMD under a 401(k) plan or IRA may be deferred until April 1 of the year after the participant attains age 70 ½. Yes, if the participant deferred their first RMD (2019) to 2020. No, if it was paid in 2019.

Do participants have to take their 2020 RMD in 2021, meaning is this a deferment or a waiver?

It is a waiver, not a deferment. There is no requirement that a participant’s 2020 RMD (otherwise due) be paid in 2021.

Is this a required plan provision or an optional one?

The answer isn’t entirely clear, but it appears the RMD waiver will be required. As of now, participants have the option of deciding to take the distribution or not. Hopefully, additional IRS guidance will be issued on this point.

Can a participant “repay” an RMD already taken in 2020 to the distributing plan?

Yes. It can be “repaid” to the distributing plan (if it accepts rollovers), another employer’s qualified plan that accepts rollovers, or to an IRA. Under the CARES Act, RMDs already paid in 2020 from eligible retirement plans are treated as eligible rollover distributions. Therefore, they can be rolled over within the 60-day period following the distribution. It is anticipated the IRS may extend the window for making such rollovers due to the timing of the CARES Act, but at this point, the 60-day rollover rule applies.

How does a plan report an RMD that is “repaid” on Form 1099-R?

Since RMDs that have been paid in 2020 are treated as eligible rollover distributions under the CARES Act, it appears they should be reported normally as taxable distributions. It is up to the participant to indicate on their individual income tax return if they completed a 60-day rollover to avoid current taxation.

Did the CARES Act provide any relief for Sponsors of Single-Employer Defined Benefit Plans?

Yes. The CARES Act does grant relief for plan sponsors who have single-employer defined benefit plans (including cash balance plans) by extending the due date for contributions required for the 2019 Plan Year (including quarterly contributions) to January 1, 2021. If a plan sponsor relies on the extended due date, the required contributions must also include interest when funded.

What about the due date of Form 5500?

Although the due date for 2019 required contributions was extended to January 1, 2021, the Act does not specifically extend the due date of the return for that Plan Year. It is expected that the Department of Labor will issue guidance to clarify this imbalance through their expanded authority.

What Expansion of DOL Authority did the CARES Act Provide?

The CARES Act granted the DOL additional authority to extend certain deadlines, including required participant disclosures, notices, and the Form 5500. We would anticipate the DOL will issue guidance soon.

What is the Paycheck Protection Program (PPP)?

The ACT authorized the Small Business Administration to offer potentially forgivable loan monies to small businesses with less than 500 employees that maintain their employees during the pandemic. The loan amount is 2 ½ times the average monthly payroll costs, including salary, wages and commissions, as well as the payments for the provision of employee benefits consisting of group health care coverage, including premiums, and retirement benefits.

Can the PPP forgivable loan money be applied to employer retirement contributions?

Although there is no clear language regarding the types of contributions that are includable in “Payroll Costs”, it is generally accepted that employer matching contributions may be included as part of the payroll costs. Profit sharing contributions are discretionary, so it doesn’t seem like an employer can include these. Although Pension contributions to Defined Benefit and Cash Balance plans are not discretionary, the consensus among the actuarial community is that these contributions should not be included in your application. The Act speaks specifically to the projected expenses for the next 2 ½ months and we already know the funding deadlines have been extended.

Can we suspend Safe Harbor Contributions until the economic effects of the Coronavirus pandemic are more clearly understood?

As of right now, no legislation has provided Employer relief with respect to Safe Harbor contributions, Top-heavy minimums or ADP/ACP Discrimination testing. Any suspension to the Safe Harbor contributions requires following procedures as current law requires. And, removing the Safe Harbor election during the Plan Year will require the plan meet current law requirements for notice requirements, ADP/ACP Testing, and Top-heavy minimum requirements, if applicable.

How can I learn more about the CARES Act?

The Families First Act and CARES Act

FAQ’s from Plan Sponsors regarding the CARES Act Coronavirus-related Distributions

FAQ’s from Plan Sponsor regarding the CARES Act Participant Loans

As we have discussed, this is a very fluid situation, and we anticipate the IRS and DOL will be issuing additional guidance. We are monitoring the situation closely and will be updating our blog section as more information is made available. As always, we are here to help you and your plan participants navigate through these difficult times. If you have any questions, please contact us.

FAQ’s from Plan Sponsor regarding the CARES Act Participant Loans

On March 27, 2020 the President signed the Coronavirus, Aid, Relief, and Economic Security (CARES) Act into law. This legislation provides relief for those suffering financially and physically from the COVID-19 pandemic.  With respect to retirement plans, the CARES Act provides targeted relief for plan participants who need access to their retirement plan funds through loans or distributions, waives required minimum distributions for the 2020 calendar year for most plans, and provides funding relief for employers who sponsor single-employer defined benefit plans.

This is the second in a series addressing questions most frequently being asked by 401(k) plan sponsors related to the CARES Act, specifically focusing on Participant Loans under the Act.

The CARES Act increased the maximum amount for participant loans to “qualified individuals” from the lesser of 50% of a participant’s vested account balance or $50,000 to 100% of a participant’s vested account balance up to $100,000. These new loan limits apply to loans made to qualified individuals from March 27, 2020 to September 23, 2020.

Additionally, the CARES Act permits suspension of loan payments due from March 27, 2020 through December 31, 2020 for new and existing plan loans for a period of up to a year for qualified individuals. Further, it allows for extension of the term of the loan for a period of up to a year, without violating the maximum 5-year term.

Who is a “qualified individual” for this purpose?

Qualified individuals are defined as any individual:

  • who has been diagnosed with COVID-19, or whose spouse or dependent has been diagnosed
  • who has experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, or having their hours reduced as a result of COVID-19
  • who is unable to work due to lack of childcare resulting from COVID-19
  • who owns or operates a business that is completely or partially closed as a result of COVID-19
  • other factors as determined by the Secretary of Treasury

Is a plan required to provide for CARES Act loans?

No. This is an optional provision, not a required one.

Does a plan have to be amended before permitting CARES Act loans?

No. The provision can be implemented immediately like coronavirus-related distributions. The plan must adopt a conforming amendment no later than the last day of the plan year beginning after December 31, 2021 (December 31, 2022 for calendar year plans), unless extended by the IRS.

Can a participant take a CARES Act loan if he or she has been furloughed or laid off?

Yes. A qualified individual can take a plan loan under the CARES Act provisions if they have been furloughed or laid off as a result of COVID-19. Additionally, the CARES Act permits loan payments due from March 27, 2020 through December 31, 2020 to be suspended for a period of up to a year. This means that an eligible participant could receive a plan loan, and the payments could be immediately suspended.

Note that interest will accrue during the suspension period. Further, it would be permissible to extend the term of the loan for a period of up to one year without violating the maximum 5-year loan term.

Do existing participant loans have to be taken into consideration when determining the maximum amount available?

Yes. Under the CARES Act, the maximum loan is equal to the lesser of 100% of the participant’s vested account balance or $100,000. If a participant has (or has had) an existing loan, the plan still must consider the participant’s highest outstanding loan balance during the last 12 months for purposes of the $100,000 limit.

For example, assume a participant has a $300,000 account balance and that he or she has taken a $50,000 plan loan within the last 12 months. In that case, the maximum CARES Act loan would be $50,000 ($100,000 less $50,000).

Do participants have to provide certification that they are a qualified individual to receive a CARES Act loan?

Unclear. The CARES Act doesn’t specifically require participant certification for this purpose, although certification is required for coronavirus-related distributions. Hopefully, the IRS will issue guidance on this point, but absent that guidance, it would be prudent for plan sponsors to obtain certification.

After the suspension period, how will loan repayments be applied?

Unclear. The Act doesn’t specifically dictate how the suspended loan repayments coordinates with the “one-year” suspension period, whether the loans will be re-amortized, deductions will be doubled, or the repayment period will be extended past the original term. Hopefully, the IRS will issue guidance on this point before January 2021, but absent that guidance, it would be prudent for plan sponsors to re-amortize the note to the original term.

Important Note: It is expected the IRS and DOL will issue guidance with respect to the provisions of the CARES Act, as well as other retirement plan-related matters that were not addressed in the Act. It is also possible Congress will pass additional legislation, so the situation remains fluid.

Note: this is the second in EJReynolds’ series on the  CARES Act . To see the first in this series “FAQ’s from Plan Sponsor regarding the CARES Act Coronavirus-related distributions”: PLEASE CLICK

As regulations and further legislation is passed, EJReynolds will keep you informed and up to date. We are taking all necessary precautions and monitoring the situations, but we are here for you and want to assure you we will continue to provide the level of service you have come to expect. We hope you, your families and circle of friends are and remain healthy. We will get through this, one day at a time.

FAQ’s from Plan Sponsors regarding the CARES Act Coronavirus-related Distributions

On March 27, 2020 the President signed the Coronavirus, Aid, Relief, and Economic Security (CARES) Act into law. This legislation provides relief for those suffering financially and physically from the COVID-19 pandemic.  With respect to retirement plans, the CARES Act provides targeted relief for plan participants who need access to their retirement plan funds through loans or distributions, waives required minimum distributions for the 2020 calendar year for most plans, and provides funding relief for employers who sponsor single-employer defined benefit plans.

This is the first in a series to address questions most frequently being asked by 401(k) plan sponsors related to the CARES Act, specifically related to Coronavirus-related distributions under the Act.

The Act allows eligible retirement plans to make “coronavirus-related distributions” to “qualified individuals”.  Such distributions are exempt from the additional 10% income tax for early withdrawals, and any plan distribution, up to $100,000, can qualify.  Additionally, the new law allows participants to pay the applicable income tax ratably over a three-year period, and also provides participants the opportunity to defer taxation by “repaying” the distribution to a qualified plan or IRA during the three-year period immediately following the distribution.

What plans are “eligible retirement plans”?   Eligible retirement plans include 401(k) and other qualified plans, 403(b) plans and governmental 457(b) plans. Individual Retirement Accounts, including SIMPLE IRAs and SEPS, are also considered eligible retirement plans for this purpose.

Who are “qualified individuals”?   Qualified individuals are defined as any individual:

  • who has been diagnosed with COVID-19, or whose spouse or dependent has been diagnosed
  • who has experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, or having their hours reduced as a result of COVID-19
  • who is unable to work due to lack of child care resulting from COVID-19
  • who owns or operates a business that is completely or partially closed as a result of COVID-19
  • other factors as determined by the Secretary of Treasury

Are plans required to permit coronavirus-related distributions?   No. This is an optional provision, not a required one.

Does a plan need to be amended before it can permit coronavirus-related distributions?   No. The provision can be implemented immediately. The plan must adopt a conforming amendment no later than the last day of the plan year beginning after December 31, 2021 (December 31, 2022 for calendar year plans). Note that this deadline could be extended by the IRS.

Is this a new type of hardship distribution?   No. Rather, a “coronavirus-related distribution” is defined as any distribution made on or after January 1, 2020 through December 31, 2020 to a qualified individual. This means that any distribution could qualify, even if it was made before the law was enacted and could include hardship distributions, termination distributions, in-service distributions made upon attainment of age 59 ½, etc. A plan is permitted to allow coronavirus-related distributions to qualified individuals even if they would not otherwise be eligible for a distribution under the terms of the plan document.

What 401(k) plan accounts are available for coronavirus-related distributions?   The CARES Act provides a waiver of most of the normal distribution restrictions. This means that coronavirus-related distributions can be made from any of the following accounts in a 401(k) plan:

  • Elective deferral accounts (including 401(k) and Roth accounts)
  • Safe harbor contribution accounts
  • Employer profit sharing and matching contribution accounts
  • Rollover contribution accounts
  • Voluntary after-tax contribution accounts
  • QNEC and QMAC accounts

Note: The CARES Act did not waive the distribution restrictions applicable to pension plan accounts. As a result, if a 401(k) plan has pension plan account balances (i.e. merged or transferred money purchase pension plan accounts), those accounts would not be eligible for a coronavirus-related distribution unless the participant has terminated or attained age 59 ½.

Can terminated participants receive coronavirus-related distributions?   Yes. Provided they are a qualified individual.

Does a participant have to provide proof of their need?   No. But they do have to provide certification that they meet the requirements to receive a coronavirus-related distribution. The key here is whether the individual is a qualified individual; it is not dependent on a specific “need” like hardship distributions. Under the CARES Act, the plan sponsor can rely on the participant’s certification that he or she is a qualified individual to make such a distribution.

Is there a limit on coronavirus-related distributions?   Yes. From a plan perspective, coronavirus-related distributions cannot exceed $100,000, considering all plans maintained by the employer (including controlled or affiliated service group members) on an aggregated basis.

On an individual basis, coronavirus-related distributions are also limited to $100,000, after considering all distributions made from eligible retirement plans. This means that if a participant takes a $100,000 distribution from their employer’s qualified plan and also takes a distribution from their IRA, any amounts in excess of $100,000 would be subject to the 10% additional excise tax on early withdrawals (if they would not otherwise be exempt, e.g. they have attained age 59 ½). Additionally, the amounts in excess of $100,000 would be taxable in 2020 and could not be repaid to defer taxation.

Is there a window for making coronavirus-related distributions?   Yes. Only distributions made between January 1, 2020 and December 31, 2020 can qualify.

Are coronavirus-related distributions subject to mandatory 20% federal withholding?   No. For this purpose, coronavirus-related distributions are not considered to be eligible rollover distributions. As such, they are not subject to mandatory 20% federal withholding. Rather, they are subject to 10% federal withholding, unless the participant elects otherwise (like a hardship distribution).

Note: Participants are not required to receive the special tax notice (i.e. the “402(f) notice”) normally required for eligible rollover distributions; however, the plan sponsor must provide notification to the participant of their right to waive the applicable 10% federal withholding and provide them the opportunity to do so.

How does a plan report coronavirus-related distributions on Form 1099-R?   At this point, the IRS has not issued guidance. Presumably, it will be reported normally as a taxable distribution, although it is possible the IRS will create a new code for this purpose.

How does a participant tell the IRS they want to pay the applicable income tax over the three-year period?   It is anticipated the IRS will update IRS Forms 8915A and 8915B (which address previous Disaster Retirement Plan Distributions and Repayments) for this purpose.

How does a participant “repay” the distribution to defer taxation?  If a participant repays all (or a portion) of a coronavirus-related distribution, it is treated as a 60-day rollover provided it is made within the three-year window. The repayment can be made to the distributing plan (if accepts rollovers), to another employer’s qualified plan that accepts rollovers, or to an IRA. Further, the repayment can be made in one (or more) payments.

Again, it is anticipated the IRS will update IRS Forms 8915A and 8915B to be used for this purpose. In that case, the reporting burden will be on the plan participant, not the plan itself.

If a participant “repays” a coronavirus-related distribution, how is it treated from a plan and recordkeeping perspective?    The answer isn’t entirely clear. Since it is treated as a 60-day rollover, however, it would presumably be treated as a rollover contribution. In that case, if repaid to the distributing plan, it would be treated as a related rollover for top-heavy purposes.  Hopefully, the IRS will provide guidance on this point.

Important Note: It is expected the IRS and DOL will issue guidance with respect to the provisions of the CARES Act, as well as other retirement plan-related matters that were not addressed in the Act. It is also possible Congress will pass additional legislation, so the situation remains fluid.

As regulations and further legislation is passed, EJReynolds will keep you informed and up to date. We are taking all necessary precautions and monitoring the situations, but we are here for you and want to assure you we will continue to provide the level of service you have come to expect. We hope you, your families and circle of friends are and remain healthy. We will get through this, one day at a time.