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COVID-19 Relief: Information for 401(k) and Retirement Plans

by Mickie Murphy, Blue Benefits Consulting | This article was originally published on March 24th and was most recently updated on June 4th. It is being updated as new information becomes available. 

We have answers to questions employers are asking about their plans:

Changes to Plan Contributions

Can employees stop their deferral contributions?

  • Employees may stop contributing to their 401(k) or 403(b) at any time, even if a plan only permits changes quarterly or twice a year. Just complete the usual election form (either paper or online) indicating the new deferral amount is 0%.
  • Remember, this will not affect participant loan payments.

Can the Employer stop matching contributions?

  • In general, matching contributions may be stopped. Depending upon the type (Safe Harbor or discretionary) and how the plan is written, this may require an amendment to the plan and/or a 30-day notice to the employees.
  • It is also possible to change the timing of matching contributions so that instead of matching each payroll, you may make the match contribution as late as the tax filing deadline for the 2020 plan year.

Can Safe Harbor contributions be stopped?

  • In general, yes with an amendment to the plan and 30 days’ notice to the employees.
  • Contributions must continue until the end of the notice period and regular testing would apply for the full year.

Are profit-sharing contributions required?

  • Generally, profit-sharing contributions are discretionary and no decision would need to be made until the end of the business year.
  • Some plans do have a required contribution and would need to be amended very early in the year to avoid a contribution requirement.

Is there any relief for pension contributions? 

  • Pension contributions are mandatory, however, you may have some flexibility in timing of contributions or the dollar amount. Congress is discussing a pension contribution holiday, but that is yet to be determined and is not part of the CARES Act. More to come!

Distributions & Loans

Is there special distribution relief for Covid-19?

  • The CARES Act passed with an effective date of March 27, 2020 provides employers the ability to add a special in-service distribution option for the 2020 year, called a Coronavirus Related Distribution (CRD).
  • The plan document will need to be amended to permit CRDs for active employees, but not until 2022. Distributions may begin immediately however.
  • Requires self-certification from the participant that they are a Qualified Individual.
  • Participant may withdraw up to $100,000 or 100% of vested balance.
  • There is a waiver of 10% early withdrawal penalty and participant may elect to waive standard withholding taxes at the time of distribution.
  • Funds may be redeposited to a retirement plan or IRA within 3 years.
  • Participant will be able to pay taxes on the distribution amount over a 3 year period. The taxability will be calculated as part of their personal tax return each year.
  • Some investment platforms are able to provide the election to waive standard withholding for CRDs to terminated employees, as well.

What COVID-19 relief is available for participant loans?

  • Plans permitting participant loans may increase the maximum loan permitted under the CARES Act.
  • Effective for loans made between March 27, 2020 and September 22, 2020, plans may be amended to permit participants to borrow up to $100,000 or 100% of participant’s vested balance.
  • All other loan provisions remain the same pursuant to plan document and loan policy.
  • Plans without loans may amend to permit only coronavirus related loans.
  • Loan payment relief is available for all existing participant loans for Qualified Individuals
    • Loan payments through December 31, 2020 maybe be suspended up to 12 months upon request by the participant
    • Suspended payments may be added to the original loan term not to exceed a total loan term of 6 years
    • Interest continues to accrue during the suspension period
    • Furloughed or laid off employees may suspend payments as well

What is a Qualified Individual for CRDs and loan relief?

  • An individual diagnosed with coronavirus or related virus illness.
  • Individual with a spouse or dependent diagnosed with the virus or related illness.
  • Someone who is experiencing “adverse financial consequences” as a result of
    • Quarantine
    • Furlough
    • Being laid off
    • Reduction in work hours
    • Business closure
    • Need to stay home for lack of care for a dependent
    • Other factors as may be determined by the IRS due to the coronavirus emergency.
  • The employer may rely on the participant’s self-certification that they fall into the Qualified Individual category.

Who is eligible for a standard plan distribution?

  • Generally, terminated employees will be eligible to take a distribution from their plan, which includes layoffs.
  • Furloughs may not be considered termination of employment eligible for distribution.
  • Termination of 20% of the workforce in a 12 month period may trigger partial plan termination.
  • Rehiring employees within 12 months may affect partial plan termination.

What about standard in-service or hardship withdrawals?

  • Plans with standard hardship provisions are able to take COVID-19 into consideration due to financial hardship.
  • CRD distributions have more beneficial opportunities to repay into the plan and will avoid federal withholding tax at the time of withdrawal.

If at all possible, leaving funds in the retirement plan is highly recommended, particularly in a down market.

Filing Deadlines 2019 Calendar Year

7/15/2020 – Corporation and individual returns and tax payments due

7/31/2020 – Form 5500 with extension 10/15/2020 (no relief yet)

You can learn more about the changes to the CARES Act Distributions and Loans for retirement plans by checking out the video on Blue Benefits Consulting’s Newsflash Center here.

Check your Summary Plan Description for the provisions already built into your plan. Questions regarding what you can do with your plan, should do, or might change, should be directed to your retirement plan consultant at Blue Benefits Consulting. We are here to help you find the best solution available to you and your employees.

Please continue to monitor our Coronavirus Resources and Information Page for updates.

Blue Benefits Consulting, a Blue & Co. entity, is positioned to help companies meet their retirement plan objectives. Learn more about them today.

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