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Over the last seven months, we have all had to learn to adjust. Suddenly, everyone knows about the CARES Act, the difference between a PPP Loan and PPE, and we all became experts at video conferencing. Now that the end of the year is upon us and what would traditionally be “selling season” in the retirement plan world, how can we help you close business? It may not be easy, but at EJReynolds we believe there is great opportunity in the market for taking on new business, both in the existing plan space and the start-up market.

Many of the best advisors spent the Spring contacting their clients, just to check in and alleviate any fears. Now is the time to find those existing cases that have not heard from their advisors, to show your value proposition. Don’t just ask if they have heard from their current Plan Advisor, ask leading questions. For instance, “When your current Plan Advisor contacted you at the beginning of the shutdown, how did that make you feel?” Many Plan Sponsors may say to themselves, “Well, my existing Plan Advisor didn’t contact me at the beginning of this pandemic, and now I’m feeling insignificant!”. Assessing a potential prospect can be tricky. Knowing what questions to ask at the proper time in the sales cycle can be the key to landing and satisfying a new client. Broad, open-ended sales questions may help find out what is going on in your prospect’s world, but they run the risk of wasting what little precious time that a prospect may give you.

When prospecting for a 401(k) plan, there are two main decision makers: 1) the CFO with little time to waste, especially now, or 2) the HR director who typically has too much on their plate to begin with and doesn’t want more, especially now. By merely calling these prospects, you are interrupting the status quo and you must be prepared to give them a compelling argument to make a change. As they say, change only happens when the pain of staying the same is greater than the pain of making a change.

Prospecting for 401(k) plans is a three-step process: 1) Find Promising Prospects, 2) Call the Prospect, and 3) Meet with The Prospect. It can be that easy if you are well prepared and know when to ask the right questions. Last year, we published a blog with an in-depth discussion of finding and calling the prospect. Today, we are focusing on the meeting. To read our original article, refer to The power of the right question at the right time. Whether you are new to 401(k) plan prospecting or an experienced 401(k) advisor trying to train your staff, this guide lists important questions that will engage a prospect. You will also find some key questions to avoid during the sales process.

Once you have a meeting in place, whether physical or virtual, preparation is key. Summarize your findings to a one page sheet showing specific improvement areas and procedures that you will help put into place once you are hired. If you have never presented in a virtual setting, be sure to practice before your first meeting. Video helps build rapport and create a connection with the buyer. Even if your prospects do not use their video, make sure to show yours. If you’re using Zoom or Teams, there is an option to hide your profile video, which may make it easier to present (have you ever tried to speak to a group of people with a giant picture of yourself in front of you?). Use the Chat Bar and Poll functions, especially if you are presenting to a committee. You can send links to pertinent websites, ask leading questions, and facilitate discussions without giving up control of the meeting. You may be sharing your screen with the group, but sending a link to a proposal or an article can help inspire the buyer, share a new idea or uncover needs and ultimately build an impact case to use you as a professional.

For start-up cases, the first step is to build trust in you, then focus on Plan Design. Once they agree to work with you and are confident with the concept of saving, only then should you bring in the investments. Do not lead with investments if they have not bought into the idea of working with you, and certainly if you have no idea how the plan will be designed. Many businesses are thriving in this environment, so it is a great time to look at a start-up case.

For Takeover cases, do not automatically assume you need to change everything to show you can bring enhanced services to the plan. Taking over the plan as Agent or Broker of Record is the first goal. There may be nothing wrong with the plan that more attention and care will not fix. Just making small changes to the investment lineup or adding some enhanced plan design options, might make all the difference in the world to the client and will not totally disrupt the day-to-day activities of the company. Remember, you are here to help the client.

You may also find business development value in our article The 7 Step Guide to Growing your 401(k) Business. These may be trying times, every day is a new challenge, but the secret of change is to focus all of your energy, not on fighting the old, but on building the new. Feel free to call us with additional questions on developing your 401(k) business. We love to partner with advisors for a win-win relationship.

Have you been talking with prospective clients about adopting a new 401(k) plan? Even in today’s  environment, many businesses are thriving and want to secure deductions for the 2020 Tax Year. If so, the deadline for adopting a safe harbor 401(k) plan for 2020 is fast approaching, so it would be a great time to schedule a follow-up conversation!

Safe harbor 401(k) plans are attractive for many employers (especially small employers) because they provide relief from certain plan testing requirements. Specifically, a safe harbor plan is generally exempt from ADP/ACP testing enabling the plan’s highly compensated employees to maximize elective deferrals, i.e. 401(k) deferrals/Roth contributions, without limitation. Safe harbor plans may also be exempt from the top-heavy requirements if certain conditions are met.

What is the deadline for adopting a safe harbor 401(k) plan?

In general, the deadline for adopting a new safe harbor 401(k) plan is October 1, 2020. There are, however, certain notice requirements that must be satisfied, and eligible employees must be provided a reasonable period of time to make their deferral elections. In a new plan, the rule is that all eligible employees must have at least three months to make elective deferrals under the plan, so planning ahead is key! Remember, most investment platforms take 30-45 days to be ready to accept contributions.

Are there limits on the amounts that can be deferred?

No. There are no restrictions (other than the normal limits) placed on the amounts that can be deferred during this three-month period. As a result, owners, key employees and any other participants would still have time to make elective deferrals of $19,500 (plus $6,500 for participants age 50 or older). This, of course, assumes they will have enough compensation to do so within this time period.

What are the contribution requirements?

The plan must make either a safe harbor matching or safe harbor nonelective contribution.

The basic safe harbor matching contribution formula is 100% on the first 3% of deferrals, plus 50% on the next 2% (maximum of 4% match). Alternatively, an enhanced safe harbor matching formula can be used, which is most commonly 100% on the first 4% of deferrals.

Safe harbor nonelective contributions must be at least 3% of each participant’s compensation, regardless of whether they elect to make deferrals.

Note that safe harbor contributions (match or nonelective) must be 100% vested, subject to the same distribution restrictions as elective deferrals, and cannot be subject to any allocation conditions, e.g. employment on the last day of the plan year.

Tax credit available for Small Employers

As an incentive to establish a new 401(k) plan, the SECURE Act added provisions for small employers (generally, businesses with no more than 100 employees) to receive a tax credit of up to $5,000 (per year, for the first three years) to help defray the costs associated with establishing and maintaining a plan. An additional credit of $500 per year is available for new or existing plans adding an automatic enrollment feature.

Which design is best?

One-size does not fit all. It really depends on the goals of the employer and demographics of the workforce. Although the SECURE Act made changes to the Safe Harbor Non-elective plan design, the plan must still be in effect for at least three months. The good news is that we can assist you in determining what will work best for your clients after considering their unique needs! Please contact us to learn more.

If you would like to learn more about these rules, please contact us and we will be happy to assist you.

With summer upon us and fiscal deadlines approaching, you may be facing the daunting task of hiring an auditor. 

ERISA requires an annual audit on plans with more than 100 eligible participants. Choosing a qualified plan auditor helps insure that you meet your legal responsibility to file a complete and accurate annual report/return known as the Form 5500. This form must meet standards from both the Internal Revenue Service (IRS) and the Department of Labor (DOL).

The fees charged by CPAs for retirement plan audits can range from $5,000 to $20,000. It may be tempting to shop for auditing services on price alone, but this approach can have long term consequences.

If your Form 5500 is considered incorrect or incomplete, it is subject to rejection and Plan Sponsors could be charged substantial civil penalties. In some cases, the penalties could even double the initial cost of your audit.

• The IRS can charge you up to $250 per day, up to $150,000.

• The DOL can charge penalties of $300 per day until a complete Form 5500 is filed, up to $30,000 per year.

Full Scope Audits Are More Comprehensive Than Limited Scope Audits

The Limited Scope Audit option is available for retirement plans whose assets are prepared and certified by a bank or similar institution, or by an insurance carrier that is regulated, supervised, and subject to periodic examination by a state or federal agency that acts as a custodian or trustee. The Limited Scope option relies on the trustee or custodian holding the assets to provide certification that the investment information is accurate and complete. In a Full Scope Audit, everything in the plan, including the investments, is subject to audit testing. The Limited Scope Audit limits the information that is audited.

The Limited Scope Audit composes 65% of retirement plan audits, but it does not protect the participants, according to the former  Assistant Secretary of Labor Phyllis C. Borzi. Speaking at a recent conference of Certified Public Accountants, Borzi called the Limited Scope Audit “practically useless.” She also told the attendees that the primary auditors who are most likely to produce substandard audits are those who think their rate of compensation is inadequate.

Choosing a Retirement Plan Auditor

Here is a list of things you should review before choosing an auditor for your plan:

• Your auditor must be licensed/certified – Federal law requires that the auditor you engage must be licensed or certified as a public accountant by a State regulatory authority.• Your auditor must be independent – The auditor you choose should not have any financial interests in the Plan or the Plan Sponsor. The auditor must be able provide an objective, unbiased opinion about the financial condition of the Plan.

• Your auditor should be experienced – According to the Department of Labor (DOL) one of the most common reasons for deficient accountant’s report is the failure of the auditor to perform test in areas unique to qualified plans. Hiring an auditor with training and experience in performing qualified plan audits will make it more likely the auditor is aware of the special auditing standards and rules that apply to qualified plans. 

Check References Before Engaging an Auditor

• Ask about their work with other qualified plans.

• See if they are a member of AICPA’s Employee Benefit Plan Audit Quality Center. The Employee Benefit Plan Audit Quality Center helps auditors meet the challenges of performing quality audits in the complex areas of qualified plans.

• You may also wish to verify with the correct State regulatory authority that the auditor’s holds a valid, up-to-date license or certificate to perform auditing services.

When a Less Experienced Auditor Is Assigned to Your Plan

There will be some instances when a less experienced auditor may be assigned to perform the audit of your plan to reduce audit costs. When this happens, make sure that a more experienced manager or partner will be reviewing their work.

The Engagement Letter

Once you have chosen an auditor, a contract also known as an “engagement letter” will be provided by the auditor for review and approval.

The letter of engagement from your auditor should include:

• The work to be performed.

• The timing of the audit.

• The responsibilities of both parties.

Review the letter carefully and resolve any questions prior to engaging the auditor for a smoother auditing process. Many of our clients at EJReynolds, Inc. undergo an annual audit and we work with several quality audit firms. If this process is new to you, or if you are interested in speaking with a new auditor, please feel free to ask your plan’s administrator for a list of referrals.

As all should be aware of by now, 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. Friday, June 19, 2020, the IRS issued Notice 2020-50 (the “Notice”), which provides expanded guidance on Coronavirus-Related Distributions (“CRDs”) and the CARES participant loan rules.

In today’s EJReynolds Blog, we will focus on the guidance on CDR’s specifically. Loan provisions are beyond the scope of this article.

Expanded Definition of a Qualified Individual

The original language of the CARES Act defined Qualified Individuals (“QIs”), i.e., those that may take advantage of the liberalized distribution and loan rules, to be:

• A participant who is diagnosed with the virus.
• A participant whose spouse or dependent is diagnosed with the virus; or
• A participant who has suffered financial loss from the pandemic because he or she:
  • Was laid off, furloughed, quarantined, or had reduced hours.
  • Cannot work due to the unavailability of childcare because of the pandemic; or
  • Owns or operates a business that has had to close its doors or reduce hours; and
• An individual with other factors as determined by the Secretary of Treasury.

The last item allows the IRS to make changes as deemed necessary, and the Notice grants relief not only to these individuals, but adds the following categories to the definition of QI:

• A participant whose pay or self-employment income is reduced, or who has had a job offer rescinded or a new job’s start date delayed due to the pandemic.
• A participant whose spouse or a member of his/her household has suffered the following financial effects due to the pandemic:
  • Layoff, furlough, quarantine, reduced hours, or reduced pay or self-employment income.
  • Cannot work due to childcare unavailability; or
  • Has had a job offer rescinded or the start date of a new job delayed.
• A business owned or operated by the participant’s spouse or a member of the participant’s household has closed or reduced hours.

For this purpose, a “member of the household” is someone who shares the QI’s principal residence. Presumably, this could include a significant other, roommate, other relative, or anyone else with whom the individual is sharing a home. This expanded definition grants the QI Status to many individuals who may not have been directly impacted by the virus, but still have suffered financially.

Guidance for Employer-Sponsored Retirement Plans

The Notice clarifies that the CRD and CARES Act loan provisions are optional. A Plan Sponsor may elect to implement the provisions in full, in part or not at all. Regardless of adoption, participant distributions of most types may be treated as CRDs on their personal tax return, if the participant meets the necessary requirements, and the participant may receive a refund if the mandatory 20% withholding was in excess of the actual amount owed.

Employer Reliance on Employee Certification

The Notice emphasizes that the Plan Sponsor can rely on the participant’s self-certification that he or she is a Qualified Individual, unless the Sponsor has actual knowledge to the contrary. The IRS notes that “actual knowledge” does not mean the Administrator must take additional steps to determine whether the participant meets the requirements. For this purpose, the IRS provided a sample self-certification that is deemed to be acceptable. The Certification simply provides “I certify that I meet one of the following conditions …” and then outlines the categories of QIs. There is no need for the participant to specify which category applies to him/her. The lack of the requirement to certify the specific reason why someone is qualified may also avoid any privacy concerns about asking about the QI’s health.

The Notice goes into significant detail about the tax reporting and payment rules relating to CRDs.

What Is considered a Coronavirus Related Distribution?

The Notice clarifies that a CRD is almost any distribution to a QI (not to exceed $100,000) made during 2020. It is possible that the employer and the participant may have different thoughts about whether a given distribution is a CRD. While a Plan Sponsor may choose not to amend its plan to provide for CRDs, the participant is not obligated on his or her tax reporting by the way in which the plan treated the distribution. If the participant meets the definition of a Qualified Individual, the QI can designate any distribution amount as a CRD for his or her taxes. These are discussed below.

From the Employer’s Perspective

A plan must report any CRD of Form 1099-R as taxable income and place the appropriate distribution code in Box 7 (even if the amount is recontributed). The distribution will either be reported as a Code 2 (early distribution, exception applies); or (2) Code 1 (early distribution, no known exception). The first option is more consistent with an employer that recognizes that the distribution is a CRD. If a plan acknowledges that the distribution is a CRD, it is not an eligible rollover distribution from the plan’s perspective (even though the participant can roll it over). This means that the amount is not subject to the 20% mandatory withholding (waivable 10% withholding applies), and the participant does not need to receive a “Special Tax Notice Regarding Plan Payments”.

Participant Designations of CRDs

A QI designates a distribution as a CRD by reporting the distribution on his or her 2020 tax return and filing Form 8915-E (which the IRS indicates will be available before the end of this year). A CRD reported on Form 8915-E qualifies for the waiver of the 10% premature distribution tax under Code section 72(t), the spreading of the income from the distribution over three years (if desired), and the ability to recontribute any portion of the distribution to an eligible retirement plan within three years and have it treated like a nontaxable trustee-to-trustee transfer of the funds. Form 8915-E is also used to report amounts includible in income or recontributed in years after 2020.

The Three-Year Spread of Income

The QI may choose to include the total income from the CRD in 2020 (i.e., when received) or ratably over 2020, 2021, and 2022. Once the QI timely files his or her 2020 taxes reflecting one of those two methods, it cannot later be changed. All CRDs received must be treated the same for this purpose.

Recontributions

Amounts recontributed prior to the tax return due date (including extensions) for a given year may be reflected on that return. For example, a participant who recontributes a CRD on or before his/her extended 2020 tax return due date of October 15, 2021, may reflect the reduction in taxable income from the recontribution on that return. IRA owners are normally permitted to make only one IRA rollover per calendar year. The recontribution of CRDs to an IRA, notwithstanding the fact that they are to be treated for tax purposes as rollovers, does not count against that one-per-year limitation.

Recontributions are treated as follows for tax purposes:

1. 1-year income inclusion method, recontribution made by that year’s tax return due date: The entire CRD is shown as income in 2020; the entire repayment is shown on Form 8915-E for 2020. The QI recognizes no taxable income (or only that amount of CRD more than the recontribution) for 2020 from the CRD.
2. 1-year income inclusion method, recontribution made in a later year: The entire CRD is shown as income in 2020. When the recontribution is made, the taxpayer must file an amended 2020 return with attached Form 8915-E, and the income from the CRD on the 2020 return will be adjusted accordingly.
3. 3-year income inclusion method, recontribution of all or a portion before 2020 taxes are filed: The 2020 tax return will reflect taxable income equal to one-third of the CRD received during the year (up to the $100,000 maximum). Form 8915-E that is filed with the 2020 return will reflect any recontribution up to the tax return due date. If the recontribution equals or exceeds the amount of income for 2020, there will be no net taxable income from the CRD in 2020. If the recontribution exceeds the 2020 income, the offset to income will be applied in 2021 (or, if necessary, 2022).
4. 3-year income inclusion method. Recontribution made in years after 2020 taxes are filed: If repayments occur after income from CRDs has been claimed (and appropriate taxes paid), the QI has a choice of carrying the income offset forward or backwards.

The Notice also included guidance on expanded loan features under the CARES Act, which we will dive into more in future writings. If you have specific questions related to Coronavirus Related Distributions, please reach out to your Plan Consultant at EJReynolds, and may you continue to keep healthy and safe.

Over the past months, EJReynolds have discussed the many different aspects of the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Small Business Administration, along with the Treasury Department, are tasked with the oversight of the PPP Loan and any operational forgiveness of the proceeds. On June 5, 2020, the Payroll Protection Program Flexibility Act was signed into law, making changes to the program and clarifying other aspects.

Highlights include:

Extension of coverage period. Under the CARES Act and subsequent guidance a borrower must use the funds within eight weeks after the loan origination. The PPP Flexibility Act extends this period to the earlier of 24 weeks after the origination date or December 31, 2020. Borrowers who received those funds prior to June 3rd have the option to keep the original eight-week period or extend the coverage period for 24 weeks.

Adjustment of non-payroll cost threshold. Previous regulations issued by the U.S. Treasury Department indicated that eligible non-payroll costs couldn’t exceed 25% of the total forgiveness amount for a borrower to qualify for 100% forgiveness. The PPP Flexibility Act raises this threshold to 40%. (At least 60% of the loan must still be spent on payroll costs.) An important caveat is that if the 60% threshold is not met, none of the loan is forgiven.

Lengthening of period to reestablish workforce. Under the original PPP, borrowers faced a June 30, 2020 deadline to restore full-time employment and salary levels from reductions made between February 15, 2020, and April 26, 2020. Failure to do so would mean a reduction in the forgivable amount. The PPP Flexibility Act extends this deadline to December 31, 2020.

Reassurance of access to payroll tax deferment. The new law reassures borrowers that delayed payment of employer payroll taxes, which is offered under a provision of the CARES Act, is still available to businesses that receive PPP loans. It won’t be considered impermissible double dipping.

Payback Period. New borrowers now have five years to repay the loan instead of two. Existing PPP loans can be extended up to 5 years if the lender and borrower agree. The interest rate remains at 1%.

Additional Exceptions. The legislation includes two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they don’t fully restore their workforce. Previous guidance already allowed borrowers to exclude from those calculations employees who turned down good faith offers to be rehired at the same hours and wages as before the pandemic. The new bill allows borrowers leeway if they could not find qualified employees or were unable to restore business operations to February 15, 2020, levels due to COVID-19 related operating restrictions.

Important note: The SBA has announced that, to ensure PPP loans are issued only to eligible borrowers, all loans exceeding $2 million will be subject to an audit. The government may still audit smaller PPP loans, if there is suspicion that funds were misused.

To read our last blog on the Small Business Administration Paycheck Protection Program, click here. 

Read our past blogs for more information.

For the Coronavirus, Aid, Relief and Economic Security (CARES) Act, click here.

For FAQs on the CARES Act Coronavirus-related distributions, click here.

The Paycheck Protection Program (PPP) is one of the key features of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Although much has been determined, there are several sections that are confusing and difficult to understand. Aimed at small businesses, the PPP loan program was designed to help qualified employers maintain their existing employees and funding has now expanded to almost $670 billion. Because the Small Business Administration has yet to release its interim final rule focusing on forgiveness of the loan, many loan recipients are scrambling to organize documentation and procedures based on expectations. Since the funds must be used within eight weeks of receipt, there is fear that the rules for documentation may come too late.

What is it?

The PPP program is authorized to make loans, which are eligible to be forgiven, to small businesses to pay their employees during the COVID-19 crisis. The program provides loans to pay up to eight weeks of payroll costs (based on the last year’s payroll costs) including health and retirement benefits. Funds can also be used to pay interest on mortgages, rent, and utilities, although the use of the funds to pay non-payroll related costs is limited to 25% of the total. The maximum loan is $10 million. The terms on all loans will be the same for everyone.

Overview of the PPP

The loan amounts will be forgiven provided the loan proceeds are used:

1. To cover payroll costs, most mortgage interest, rent, and utility costs over the eight-week period after the loan is made; and
2.  Employee and compensation levels are maintained. Reducing employee levels and payroll will reduce the amount of loan forgiveness.

Payroll costs are capped at $100,000 on an annualized basis for each employee

No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees.

Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels.

• Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.
• Any portion of a PPP loan that is not forgiven is carried forward as an ongoing loan at a fixed rate of 1%, amortized monthly.
• Loan payments are deferred until six months from the day the loan was disbursed and must be paid in full within two years from the day the loan was funded.

Recent IRS regulations indicate that any expenses paid by the proceeds of the PPP loan cannot be deducted. It is imperative that well documented records are kept following all disbursements.

Primary Eligibility

The PPP is established for small businesses with 500 or fewer employees. The business applying for the PPP loan must have been in operation on February 15, 2020, and either had paid employees or paid independent contractors. There are similar general eligibility requirements for independent contractors and eligible sole proprietorships. Eligible entities include:

• For profit companies, including C- or Subchapter S- corporations
• Non-profits organized under Section 501(c)(3) of the Internal Revenue Code (IRC)
• Veterans’ organizations organized under Section 501(c)(19) of the IRC
• Tribal concerns
• Partnerships
• Sole proprietorships
• Independent contractors

What are the business owner obligations if the loan is granted?

Borrowers must certify that the funds will be used to retain workers, maintain payroll, or make mortgage, lease, and utility payments as specified under the PPP. For the loan to be forgiven, the borrower will be required to provide documentation of payroll and benefits costs to its lender. 

How does a business owner apply?

Complete the Paycheck Protection Program Borrower Application Form Small businesses can apply through any existing SBA7(a) lender. We encourage you to apply as quickly as you can because there is a funding cap, and it appears loans will be granted on a “first come, first served” basis. Most lenders appear to be prioritizing their existing customers during the application process. Some lenders are requesting prior return information or financial statements, although there is no statutory requirement to provide this.

Conclusion

The initial round of funding of the PPP was depleted quickly, but Congress and the President were quick to act and supply additional funding. Several companies that did not necessarily qualify for the funding based on the original rules may have received it, and now many have decided to return the money. The Treasury Department stated that there would be amnesty for any companies that returned the funds by May 14, 2020. While there is foundational information available about calculating and documenting the PPP loan forgiveness, Interim Final Rules, supplemental FAQs, and ongoing clarifications are expected from the SBA. We will continue to keep you informed on any changes. Please contact your EJReynolds Plan Consultant with any specific questions you may have on the Payroll Protection Program.

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.

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.

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.