March 30, 2020

COVID-19 Considerations for Retirement Plans During the Pandemic

The COVID-19 pandemic, with many companies being forced to cease operations by state-issued stay in place orders or shutting down or curtailing operations, could affect the operation of qualified retirement plans.

Following are some issues that companies should review and consider:

Plan Loans

  • Loan payments withheld from compensation must continue even if employees are not working as a result of COVID-19.
  • Employees on unpaid leave or furlough can forego loan repayments during the first year of the leave or furlough if permitted under the plan loan rules. Amortization of the loan will have to be recomputed as the loan must be repaid within the original loan term. You can amend your plan to permit forgoing loan repayments in these circumstances.
  • The Coronavirus Aid, Relief and Economic Security (CARES) Act, enacted last Friday, March 27, 2020 (CARES Act), permits defined contribution plans (e.g. 401(k) plans) to increase the maximum loan amount from the lesser of $50,000 or 50% of the participant’s vested benefit to the lesser of $100,000 or 100% of the participant’s vested benefit for participants affected by COVID-19 for loans made before Sept. 23, 2020. Participants and their spouses and dependents who test positive for COVID-19 (under an approved test) or who experience adverse financial consequences from being quarantined, furloughed, laid off, hours reduced, business closing, unable to work for lack of childcare, or other factors to be determined in regulations are “Affected Participants” eligible for the increased loan amount.
  • Plan loan repayments by an Affected Participant due before Dec. 31, 2020, (whether under a new loan or existing loan) are delayed for one year (with interest at the loan rate). The delay will not count toward the maximum loan repayment period (normally 5 years).

In Service Distributions

  • Look at your plan rules regarding in service distributions. Many 401(k) plans permit in-service hardship distributions based on safe harbor hardship rules that include payment of medical expenses and prevention of foreclosure of principal residence. Plans may be amended to use other hardship rules subject to compliance with the IRS regulations
  • Amounts not attributable to salary deferral contributions may also be distributed at age 59½ or after expiration of a fixed number of years if permitted by the plan or an amendment to the plan
  • In-service distributions are taxable income to the participant and subject to 10% penalties if made before age 59½
  • Under the CARES Act, defined contribution plans may permit in-service distributions to Affected Participants of up to $100,000 prior to Dec. 31, 2020. These distributions are not subject to the 10% penalty on distributions prior to age 59½, and any portion repaid within three years is treated as a rollover not subject to income taxes.

Required Minimum Distributions.

  • Required minimum distributions required to be made in 2020 (including any delayed initial distribution for employees who reached age 70½ in 2019) are waived.

401(k) Plans

  • Salary deferral contributions elected by participants must continue to be withheld from compensation and timely paid to the plan trustee. If you limit the timing of changes in salary deferral contributions, you may want to consider providing more flexibility on changes by plan amendment if necessary.
  • If you use the current year for ADP/ACP testing, you may want to look at your projected test results as a result of a shutdown in operations and adjust deferrals of the highly compensated to avoid failing the test at year end.
  • Discretionary nonelective contributions and discretionary matching contributions may be adjusted or eliminated
  • Safe harbor matching and other safe harbor nonelective contributions must be made unless your notice to participants reserved the right to change the contributions under limited circumstances. Review your safe harbor notice.
  • Review your hour of service definition for granting credit for periods when employees are not working whether with or without pay as credit for some hours may have to be provided for vesting and benefit purposes under all forms of qualified retirement plans.

Defined Benefit Plans

  • Payment of minimum required contributions due in 2020 can be deferred to Jan. 1, 2021, under the CARES Act.
  • Under the SECURE Act passed in 2020, defined benefit plans may permit participants aged 59½ to commence their benefits while continuing work. Plans can also allow terminated vested participants to commence benefits prior to the participant’s normal or early retirement date.

Companies should remember that failure to comply with the terms of the plan risks penalties and restitution for loss benefits and depending, on the nature of the noncompliance, loss of tax qualification. Also, plan amendments to take advantage of actions described above may not discriminate in favor of highly compensated employees. Plan amendments to take advantage of the CARES Act provisions need not be adopted until the end of the plan year beginning on or after Jan. 1, 2022.

Please contact our employee benefits partners, Gerry Fellows or David Arnburg, if you have any questions regarding your plan.

Visit our Coronavirus/COVID-19 Resources page for more information.