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?
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.