SBA Payroll Protection Program – Forgiveness Update

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.

For the FAQs on the Changes to Participant Loans under the Act, click here.

For FAQs on Other Miscellaneous Items under the Act, click here.

We hope that you, your family and friends continue to be safe and healthy. As you can see, there are constant changes in the market. We anticipate the IRS and DOL will be issuing additional guidance in the coming months and we will be updating our blog section frequently 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.

RMD changes affected by SECURE and CARES Acts

The Required Minimum Distribution (RMD) rules for retirement plans have been greatly affected by the Setting Every Community Up for Retirement Enhancement (SECURE) Act and the Coronavirus Aid, Relief and Economic Security (CARES) Act. The changes are straightforward for Defined Contributions type plans (401(k)s) and Individual Retirement Accounts (IRAs), but a bit more complex for Defined Benefit plans. This may require clarification, and, most likely, a technical amendment of the Code.

The SECURE Act changed the starting age for RMD’s from age 70 ½ to age 72. Effective January 1, 2020, the Required Beginning Date (RBD) for RMD’s is as follows:

  • Those who turned 70 ½ in 2019 (born prior to July 1, 1949) have an RBD of April 1, 2020, or, if later, after separation from service.
  • Those who turned 70 ½ after December 31, 2019 (those born after June 30, 1949) will have an RBD of April 1, after the later of the year they reach age 72 or separation from service.
  • Keep in mind, a 5% owner and certain of their family members must begin minimum distributions at their required beginning date, regardless of separation from service.

CARES Act Eliminates RMD’s for 2020: Section 2203 of the CARES Act eliminated the RMD’s under Defined Contribution plans and IRAs to be made during 2020. The abrupt drop in the market since December 31, 2019, made it unfair to calculate and distribute an RMD based on the prior December 31 value. Thus, rather than distribute a disproportionate amount of the current value as an RMD, Congress has decided to waive RMD’s for 2020. This waiver does not affect Defined Benefit or Cash Balance Plans, whose RMDs are based on a benefit rather than an account balance.

For Defined Contribution (401(k)) plans and IRAs, those affected by the 2020 RMD waiver will include:

  • Anyone due to take an RMD during the 2020 calendar year
  • Anyone who was 70 ½ in 2019 and waited to take the first RMD during the grace period from January 1, 2020 to April 1, 2020. The CARES Act also included a provision that if the 2019 distribution was taken in early 2020, prior to enactment of the law, the distribution may be rolled back to the plan or an IRA and remain tax sheltered. We await guidance on whether the 60-day rule will be waived or this.
  • Five-year rule extended to six as follows. Based on how the IRS handled the RMD 2009 waiver; if 2020 is the fifth year after the year of a participant’s or IRA owner’s death, then the RMD requirement to take all the money out by the end of this (the fifth) year is waived and the money does not have to be distributed until the end of the following year. In addition, beneficiaries using the 5-year rule for a participant who died prior to 2019, add a year to the 5-year rule for the waiver of the 2020 RMD year.
  • Designated beneficiary 10-year rule. The additional year would seem to apply to the new 10-year rule if the participant died during 2020.

IRA Reporting Issue: IRA’s must notify IRA owners and the IRS that an RMD is due for the year. This notice was due to IRA owners by January 31, 2020. Since this law changed on December 20, 2019, institutions’ programs could not be timely changed to prevent this notice from going to individuals turning age 70 ½ in 2020. IRS Notice 2020-6 provided a grace period for institutions to notify these IRA owners that they are not required to take a distribution in 2020 (but rather in the year they turn 72) This had to be done by April 15, 2020. Further guidance is expected since the CARES Act eliminated RMD’s for everyone for 2020. Therefore, RMD Notifications made to everyone over 70 ½ also needs to be addressed.

The SECURE Act also included considerable changes to the beneficiary rules, eliminates the IRA rule that prohibits IRA contributions after age 70 ½ and made changes to the Qualified Charitable Distribution rules to coordinate with the post 70 ½ IRA contributions.

Post 70 ½ IRA Contributions: The restriction on the ability to make annual contributions to a traditional IRA as of the year age 70 ½ is attained, had been in place since IRA’s started in 1975. Section 107 of the SECURE Act repealed the maximum age for making a traditional IRA contribution (Roth IRA’s were never subject to this rule). Effective for tax years beginning on January 1, 2020, traditional IRA Contributions may continue to be made after age 70 ½ if an individual has earned income.

Qualified Charitable Donations: Generally, a Qualified Charitable Distribution (QCD) is an otherwise taxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual who is age 70½ or over that is paid directly from the IRA to a qualified charity. Although the age for RMDs has increased to 72, the age for QCDs remains 70 ½. With no RMD to be satisfied, the incentive to those who can wait until the age of 72 to take an RMD is expected to reduce the future QCD’s until RMD’s are due at age 72. Additionally, the elimination of RMD’s in general for 2020 has many charitable organizations concerned that QCD’s may drop dramatically for 2020. Section 107 of the SECURE Act also limits the amount of the IRA distribution that may be treated as a Qualified Charitable Distribution (QCD) based on the cumulative IRA deductible contributions made after age 70 ½.

Plan Administrative and Document Impact:  All plans must be amended to increase the Required Minimum Distribution age to 72, and defined contribution plans must be amended for the elimination of the 2020 RMD’s, although both Acts state that the due date for these amendments is the last day of the plan year beginning after December 31, 2021 (or the end of the 2022 Plan Year for calendar year plans). A plan termination amendment will need to include the changes until the actual plan document amendment deadline. Affected participants should be notified. EJReynolds sent a CARES Act election form to all clients and referral partners in April to document the Sponsor’s election of certain provisions and will continue to adjust, as necessary. Please contact your EJReynolds’ Plan Consultant with any questions.

Small Business Administration Paycheck Protection Program

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.

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.

The Families First Act and CARES Act

They used to say that March comes in like a lion and leaves like a lamb. Not March of 2020. Thirty days ago, little did we know the month we’d be enduring. Two new laws have been enacted to calm the struggling economy in response to the pandemic of the Coronavirus, helping both employers and employees with a safety net of benefits. We will go over the specific items that relate to pension and payroll issues explained below.

The Families First Coronavirus Response Act, signed on March 18, 2020 and scheduled to take effect on April 1, 2020 provides benefits for employees that need to take time off to care for themselves or family members due to COVID-19, without worry of a loss of income. The law requires employers with fewer than 500 employees to offer fully paid sick leave for up to 10 days, if:
1) The employee is subject to a federal, state or local quarantine or isolation order related to COVID-19.
2) The employee has been advised by a healthcare provider to self-quarantine due to COVID-19.
3) The employee is experiencing symptoms of COVID-19 and is seeking a medical diagnosis.

Employers must provide paid leave at 100% of the employee’s regular rate of pay, up to $511 per day and $5,110 in total. In other situations, employers must provide paid sick leave at two-thirds of the employee’s regular rate of pay, up to $200 per day and $2,000 total, if:
1) The employee is caring for an individual who
a. Is subject to a federal, state, or local quarantine or isolation order related
to COVID-19, or
b. Has been advised by a healthcare provider to self-quarantine due to
COVID-19.

2) The employee is caring for a child whose school or childcare provider has been closed or is otherwise unavailable due to COVID-19 precautions.

3) The employee is experiencing any other symptoms similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor.

The law further expanded the Family Medical Leave Act to provide for up to 12 weeks of job-protected leave, 10 weeks of which would be paid, for any employee unable to work or telework because they have to care for a child under the age of 18 whose school or care provider is made unavailable for reasons related to COVID-19. This expansion requires the employee to be paid at two-thirds regular pay, up to $200 per day and $10,000 total, after the first 10 days. Those first 10 days are still unpaid, although they may be paid through accrued vacation, personal or sick leave.

The law provides refundable payroll tax credits to reimburse the employer for these costs. The tax credit applies to wages the employer pays through December 31, 2020.

Keep in mind, unless your Plan Document specifically provides otherwise, paid sick leave is eligible for 401(k) contributions, pension credits, matching and other similar employer contributions.

The Coronavirus, Aid, Relief and Economic Security (CARES) Act, signed into law on March 27, 2020, made sweeping changes to pension and 401(k) plans as well:

1) Coronavirus Distributions – The CARES Act waives the 10% early withdrawal penalty tax on withdrawals up to $100,000 from a retirement plan or IRA for any individual diagnosed with COVID-19, whose spouse or dependent is diagnosed, or is experiencing financial difficulties as a result of being quarantined, furloughed, laid off, having hours reduced or unable to work due to lack of child care due to COVID-19. Those individuals are permitted to pay tax on the income from the distribution over a three-year period, and they may repay the distribution to the plan over the next three years. The repayments would not be subject to the individual retirement plan contributions limits, and the individual can apply for a tax deduction for the taxes they will have paid as a result of the premature distribution.

2) Plan Loans – The CARES Act increases the current retirement plan loan limits to the lesser of $100,000 or 100% of the participant’s vested interest, and any existing loans with a repayment due date of March 27, 2020 through the end of the year can delay their loan repayments for up to one year.

3) Required Minimum Distributions – The Act waives required minimum distributions (RMDs) for defined contribution plans for the 2020 calendar year. Note, this is only for 401(k) 403(b), 457(b), profit sharing or money purchase pension plans. Defined Benefit Plans, including Cash Balance plans, are not exempt from the requirement. Although not considered a corporate plan, IRA holders may waive the RMD for 2020 as well.

4) Single Employer Defined Benefit Funding Rules – in general, pension contributions are due by September 15th, or 8 ½ months after the end of the plan year for minimum funding purposes. The CARES Act delays that required due date until January 1, 2021.

5) Expansion of the Department of Labor – as somewhat of a catch-all provision, the Act expands the DOL authority to change or postpone certain deadlines under ERISA. While not specific, this would generally allow limited changes without legislative acts in the future.

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.

SECURE Act Increases Tax Credit for New Retirement Plans

As part of the Further Consolidated Appropriations Act late last year, the SECURE Act greatly increased the tax credit available for “small employers” who adopt a new retirement plan. Previously, a tax credit of 50% of eligible plan-related expenses was available for the first 3 years, with a maximum credit of $500 per year. Under the new law, the maximum credit is increased to $5,000 per year with certain limitations.

In addition, the new law added a $500 credit for 3 years for new and existing plans that add an eligible automatic enrollment feature.

Which employers are eligible for the tax credit?

There are several conditions that must be satisfied in order to be eligible for the credit:

  • The employer must have had no more than 100 employees in the prior year with compensation of $5,000 or more (employees who earned less than $5,000 are not considered for this purpose).
  • The new retirement plan must cover at least one employee who is non-highly compensated (NHCE). Generally, an NHCE is a non-owner with compensation in the prior year that is less than the applicable threshold ($125,000 in 2019). In other words, the credit is not available for “owner-only” or “Solo 401(k)” plans.
  • The employer cannot have maintained a retirement plan covering substantially the same employees in any of the previous 3 years (for this purpose, a retirement plan includes the same types of plans described below).

Which types of retirement plans qualify?

  • 401(k) plans
  • Any other type of qualified plan, including profit sharing plans, money purchase pension plans, traditional defined benefit plans, and cash balance plans
  • 403(b) plans
  • SEP IRAs
  • SIMPLE IRAs

What types of expenses qualify for the start-up credit?

Expenses paid by the employer in connection with establishing the plan (e.g. plan document fees), administering the plan, or providing related employee education.

How is the start-up tax credit calculated?

For taxable years beginning after December 31, 2019, the maximum credit is equal to the lesser of (1) $5,000, or (2) $250 times the number of NHCE covered under the plan. The new law also added a minimum credit of $500.

For example, assume a plan covers the owners of a business and 10 NHCEs. Additionally, assume that plan-related expenses for the first plan year were $6,000. The available tax credit would be $2,500 for that year (10 NHCEs x $250). The credit available for the next 2 years would depend on the number of NHCEs covered and actual plan-related expenses.

If the employer adopts a 401(k) plan and a cash balance plan, is the start-up credit available for both plans?

Yes, however, the plans are aggregated for purposes of determining the maximum credit. In other words, expenses paid for both plans can be considered, but the credit is determined based on the expenses paid for the plans on a combined basis.

What are the requirements for the automatic enrollment tax credit?

Small employers (as described above) who add an eligible automatic contribution feature (EACA) to a new OR existing plan are eligible for a $500 tax credit for 3 years.  This credit is available without regard to plan expenses and is effective for plan years beginning after December 31, 2019.

How are the credits claimed?

IRS Form 8881 is used to claim both tax credits. They are reported differently depending upon structure of employer (i.e. sole proprietorship, partnership, corporation, etc.).

How can I learn more?

If you are currently working with a client to adopt a retirement plan for their employees or if you would like to learn more about this important tax incentive, please contact us.

Age for Required Minimum Distributions Increased under the SECURE Act

The SECURE Act, passed as part of Further Consolidated Appropriations Act late last year, increased the age for required minimum distributions (RMDs) from age 70 ½ to age 72. The new rule applies to RMDs required to be made after December 31, 2019 for individuals who attain age 70 ½ after that date.

Under the old rules, RMDs were required to begin no later than April 1st following the later of the calendar in which the participant attained age 70 ½ or retired. RMDs must have commenced, however, for “5-percent” owners no later than April 1st following the calendar year in which the participant attained age 70 ½ even if the owner was still working. Under the new rules, the age requirement was increased to 72 without making changes to the other requirements.

If a participant turned 70 ½ in 2019, do they still have to take their 2019 RMD by April 1, 2020?

Yes. As mentioned above, the new rules only apply to individuals who attain age 70 ½ after December 31, 2019. The old rules continue to apply to any individuals who were 70 ½ on or before that date. This also means that if RMDs have commenced, they cannot be suspended until the participant attains age 72.

Does the plan have to be amended before using the new rules?

No. A plan can implement the new rules operationally before adopting the amendment. Currently, the deadline for adopting the required amendment is December 31, 2022 for calendar year plans.

Do the same rules apply to IRAs?

Not exactly. Under the old rules, the requirement for IRAs was that RMDs must have commenced no later than April 1st of the calendar year following the calendar year in which the individual IRA owner attained age 70 ½ . There was (and is) no exception based on whether the individual was actively employed. Under the new rules, the age was increased to 72 for individuals who attain age 70 ½ after December 31, 2019.

Were there other changes made with respect to IRAs?

Yes. Previously, individuals could not make deductible contributions to traditional IRAs if they were age 70 ½ or older. The new law removed this restriction entirely, rather than increasing the age to 72. As a result, for taxable years beginning after December 31, 2019, there is no longer an age restriction for making deductible IRA contributions.

Were there changes made to death benefits payable to beneficiaries?
Yes. Generally, the life-time distribution option (often referred to as a “stretch IRA”) was eliminated for beneficiaries who are not considered to be “eligible designated beneficiaries”. Death benefits to these beneficiaries generally must be paid the end of the 10th calendar year following the year the participant or IRA owner died.

For this purpose, “eligible designated beneficiaries” include the decedent’s spouse, minor children, disabled or chronically ill individuals, and other beneficiaries who are less than 10 years younger than the deceased participant or IRA owner.

Note: The new rules only apply if the participant (or IRA owner) dies after December 31, 2019.

How can I learn more about these rules?

The rules regarding RMDs are quite complex, and the consequences of failing to issue RMDs in a timely manner are severe. Please contact your EJReynolds Consultant to learn more about these rules.

Pre-tax vs. Roth 401(k) contributions – a guide for participants

Contributing to your employer’s 401(k) plan is a great way to save for retirement, but the type of contributions you choose can have a huge impact on your finances both for now and for the future. The issue is, most employees don’t understand the differences between the Pre-tax 401(k) and the Roth 401(k), or the impact such a decision will have on their later years.

There are several similarities.

Pre-tax and Roth 401(k) contributions are both deducted from payroll, so they are contributed throughout the year, rather than in one lump-sum. Both are invested for a long period of time, and the earnings are not taxable to you while they are invested. They have the same annual contribution limits (currently $19,500 a year for workers under 50 and $26,000 a year for those 50 and over).

This is an annual, individual limit, meaning the limit applies to the total of all contributions, no matter if pre-tax or Roth contributions, or a combination of the two. Both may have distribution options available to you while still employed, depending on the plan design, and both may receive a match from the employer, again, depending on the plan design.

The main difference between Pre-tax and Roth 401(k) contributions is the timing of the taxation – when tax is paid.

A Pre-tax 401(k) contribution is deducted before federal withholding taxes are calculated. They are still subject to FICA and Medicare taxes, but reduce your current taxable income. This means that on a paycheck of $1,000 with a 10% deferral, you are taxed on $900. Over the course of a year, this can result in a large tax savings if you are in a higher tax bracket. When you take those funds out later in life, the money you distribute is taxed as standard income.

A Roth 401(k) plan is an after-tax contribution. Using the same example above of a paycheck of $1,000, your withholding taxes are calculated on $1,000. When you access those funds at retirement, both the contributions and the earnings thereon are distributed completely tax-free, assuming certain criteria are met. You must be at least age 59 ½, and it must be at least five years from your first Roth 401(k) contribution in order to distribute tax-free. If you distribute the funds prior to the criteria being met, the income on those funds is taxable and subject to the 10% excise tax on premature distributions. Unlike Roth IRAs, Roth 401(k) accounts are subject to the minimum distribution requirements. They must be rolled out of the plan and over to a Roth IRA by the time you reach age 72, or terminate employment, whichever is later, so the minimum distribution rules do not apply. For owners or certain members of their family, the account must be rolled out prior to reaching age 72, even if you continue to work.

Which Plan is right for you?

Whether you contribute to a Pre-tax or Roth 401(k) account depends on your personal circumstances. Here are a few things to consider helping you make the right choice.

  • Your age and the age you plan on retiring; a large part of the decision is to determine how long the funds will be invested and will the bulk of the money at retirement age be your own contributions or the earnings on those contributions. It may make sense to pay the tax on the contributions now in order to take out the earnings tax-free
  • Your ability to make contributions; if the tax savings allows you to make a greater contribution now, the pre-tax method may make more sense for you. At a tax bracket of 15%, a Pre-tax deduction of $100 feels like $85, but a Roth deduction feels like $100. If you would make the same contribution either way, then paying the taxes on the contributions now so you don’t pay taxes on future distributions may work out better for you in retirement.
  • Your current and expected future income; if you are just starting out in a field that will pay a much higher salary in the future, the current deduction may not make a difference to you now and will start the five year clock running, while you may want the deduction in the future.
  • Your expected tax bracket when you retire; if the tax rate stays the same, then the net effect is the same either way. If your tax rate changes and you would hope to be in a lower tax bracket in retirement, the Pre-tax account gives you the benefit of the reduction of income now while you pay less in taxes in retirement.
  • Your expected financial needs and other sources of income when you retire; keep in mind, any employer contributions (and the earnings thereon) will always be taxable to you when you receive them. Your tax professional may suggest taking all your non-taxable income first, or a combination of both in order to minimize your taxes based on your other income or financial needs.

In Conclusion:

The decision to make Pre-tax or Roth 401(k) contributions can be especially complex and vary from individual to individual. The decision should essentially be based on expectation of future income, needs and projected taxes. Don’t let the complexity keep you from contributing at all. The beauty of the situation is that nothing is carved in stone forever, your elections can be changed at least annually, depending on the rules of the plan. The most important thing is to start making contributions as soon as possible, as delays in contributions have a greater opportunity cost than any tax ramifications.

Feel free to ask your plan’s administrator, investment advisor or your own tax consultant to see what would be most beneficial to you.

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