Top 10 COVID-19 FAQs – Retirement Plan Sponsors

April 1st, 2020
by Jonathan Leidy

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The rapid worldwide spread of the novel coronavirus, COVID-19, has radically changed the way we live and do business.  It has also given rise to multiple pieces of legislation designed to combat the economic effects of the virus.

Over the past several weeks, we have fielded many COVID-19 retirement plan-related questions, and thought it would be worthwhile to consolidate them here in a list of frequently asked questions (FAQs).

Please note that reasonable efforts have been made to ensure the accuracy of this information.  However, given the speed at which this situation continues to unfold and the newness of some of this legislation, it is advisable to consult your plan administrator and/or ERISA counsel prior to making any changes.

1. What should we be telling our employees right now?

It’s scary out there.  That’s for certain.  One of the many things that has contributed to people’s unease is the precipitous decline in the global stock market.  Although things appear to have stabilized some over the past few days, I’m sure many of you are still faced with employees asking what changes, if any, they should make in their 401(k) accounts.

First off, it’s worth noting that it is not advisable for plan fiduciaries to provide specific investment advice to employees/participants.

Instead, we recommend that you provide them with an email like our COVID-19 Retirement Plan Participant Communication.  It contains some basic, yet effective, thoughts on investing for the long-run during a crisis.  If you would like a complimentary copy of that communication, please send us an email:  401k@porticowealth.com.

2. Should we be taking extra steps to protect our employees’ funds during this pandemic?

In short, no.  From a purely technical perspective, ERISA fiduciaries of 404(c) compliant plans are not responsible for each participant’s individual investment selection(s) and the performance thereof.

Naturally, your Investment Committee and/or advisor(s) will need to continue to monitor the plan’s investments.  However, if you have been satisfying your investment-related duties to the plan on an ongoing basis, you have already taken the required steps to safeguard your employees’ retirement savings by:

– Working with a fiduciary investment advisor AND/OR

– Providing your participants with high-quality, low cost investment options, including a cash option as well as one or more additional conservative choices

Of course, that’s the pragmatic view, and we understand that you undoubtedly want to do whatever you can to help your employees.

That is why we drafted the email referenced above.  Communicating with your staff during these difficult times will likely go a long way towards both assuaging their short-term concerns as well as keeping them on-track for the long-run.

3. Can we suspend or reduce our employer contribution to the plan?

To answer that question, you must first determine what type(s) of employer contribution you are making.

Employer contributions can be broken down into 2 primary categories:

– Discretionary

– Safe Harbor (SH)

Discretionary – As the name implies, Discretionary contributions, either Profit Sharing or Match, can be changed at any time and do not require participant notice prior to doing so.  However, as a practical matter, it’s a good idea to provide employees with as much notice as possible before instituting any employer contribution changes.  It’s also worth noting that, if an employee has already satisfied eligibility for a particular contribution during the current plan year, you may still be responsible for making it.

Safe Harbor (SH)– With a bit more effort, SH contributions, either Nonelective or Matching, can also be changed.  For changes to this contribution type, one of two conditions must be met:

– The SH Notice (distributed to participants before the start of the plan year) must contain language regarding the employer’s ability to suspend or reduce the contribution OR

– The employer must be operating at an “economic loss” (See Internal Revenue Code Section (IRC 412(c)(2)(A))

In addition to satisfying one of the above, notice must be provided to all employees at least 30 days (and no earlier than 90 days) prior to the effective date. Thus, the last day to make a change is 30 days prior to the end of the plan year.  All contributions accrued up to the date of the change are due to participants and remain 100% immediately vested.

Mid-year changes to either SH contribution type necessitate that the plan undergoes nondiscrimination testing for that same plan year.

4. What is the CARES Act and what does it mean for my participants?

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was sign into law on Friday, March 27th, 2020.  Within it are provision that affect retirement plans in 3 key areas:

– Hardship Distributions

– Loans

– Required Minimum Distribution (RMDs)

The act is effective as of its signing, and thus all its provisions are technically available to participants immediately.  That noted, it may take a number of days before providers are set-up to accommodate participant requests.

For a detailed summary of the CARES Act:  Click Here

5. How does CARES affect hardship distributions?

– CARES creates a new penalty-free distribution for “qualified individuals” who have been diagnosed with COVID-19; who have a spouse or dependent with the same diagnosis; or who have been furloughed, laid off, had his/her hours reduced, or been unable to work for childcare reasons as a result of the virus.

– This legislation covers IRAs in addition to ERISA-qualified plans.

– The 10% penalty normally applicable to hardship distributions will not apply.

– Taxes due on any distribution can be paid over a 3-year period, and any repayment of the distribution during that same period will avoid taxation and will not be subject to annual contribution limits.

– The maximum amount of Coronavirus-related, penalty-free distributions for any participant is $100,000.

– All vested sources within the plan are eligible for this type of distribution, apart from any money purchase assets.

– Plans that already permit hardship distributions will not likely require an amendment.

– Plans that don’t currently allow for hardship distributions must add the feature by 12/31/2020 in order to accommodate these distributions.

6. How does CARES affect loans?

– For qualified individuals (as defined above), loan limits have been increased to 100% of the participant’s eligible loan balance or $100,000 (normally 50% and $50,000, respectively).

– Repayment of the loan may be deferred for up to 12 months; interest will accrue during this deferral period.

– The payback period of the loan, normally 5 years, does not commence until after the payback deferral period has ended.

– Plan amendments authorizing these new loan provisions must be enacted by 12/31/20.

7. How does CARES affect Required Minimum Distributions?

As you may be aware, the SECURE Act, just passed at the beginning of the year, extended the age that RMDs commence for both IRAs and ERISA-qualified retirement plans from 70.5 to 72.

CARES provides for a further RMD postponement.  Specifically, anyone who would have previously had to take an RMD in 2020 from an IRA or ERISA plan (including 2019 RMDs with an April 1st, 2020 deadline) can now postpone until 2021.

Any RMD taken in 2020 can be rolled over (without regard to timing) into an eligible rollover vehicle in order to avoid taxation.

8. Can the SBA Payroll Protection Loans (PPPs) created by CARES be used to cover employer retirement plan contributions for small businesses?

PPP Loans are available to eligible small businesses, i.e. those with less than 500 employees (this includes all part-time and “other” statuses), and can be used to cover “payroll costs.”

Included in the definition of payroll costs is payment of any retirement benefit.  Furthermore, companies that meet the employee retention and salary reduction guidelines associated with PPP loans may qualify for loan forgiveness.

Thus, if you are considering reducing your retirement plan contribution, PPP Loans could be an alternative worth exploring.

To learn more about PPPs:  Click Here

9. How does the Families First Coronavirus Response Act (FFCRA) affect both employer and employee contributions to the plan?

FFCRA (effective April 1st, 2020) mandates up to 12 weeks of paid leave, predominantly at two-thirds of an employee’s regular pay, for individuals who have been affected by COVID-19.

Of the many questions pertaining to the rules and rollout of the act, one is whether employer and employee contributions should accrue and be remitted to a company’s retirement plan(s) during FFCRA leave.

The answer is yes.  Employers should continue to withhold employee elective deferrals under any ERISA-qualified retirement plan for employees on FFCRA leave and likewise make sure to remit those contributions to the plan on a timely basis.

For a summary of FFCRA:  Click Here

10. What are some good resources for COVID-19 related information?

Obviously, there are myriad online resources for COVID-19 information, spanning a number of different focus areas, e.g. financial, health, benefits, employment, etc.

Here are several that we have found valuable over the past few weeks:

Health Johns Hopkins Coronavirus Resource Centerhttps://coronavirus.jhu.edu/

An excellent source for everything ranging from basics about the virus to an interactive map for tracking the current number and location of COVID-19 cases worldwide.

Financial US Chamber of Commerce Coronavirus Small Business Guidehttps://www.uschamber.com/co/small-business-coronavirus

A plethora of information pertaining to the different federal aid programs, including a great deal on the new loan programs available through CARES, as well as overarching best practices  to consider adopting during this crisis.

Retirement401(k) Helpcenter’s Collective Wisdom on the Coronavirus Page: http://www.401khelpcenter.com/cw/cw_401k_coronavirus.html#.XoJnjYhKi70

Apart from whatever you might be receiving from your recordkeeper and administrator, this archive is an excellent source for retirement plan-related articles and updates resulting from COVID-19.

Additionally, if you are looking for a comprehensive list of resources that is updated daily, one of our preferred partners, Filice Insurance, has a stellar site available:  http://filice.hs-sites.com/coronavirus-daily-updates.

Filice, and their team of benefits experts, is also available for complimentary, personalized guidance.  For assistance, feel free to reach out to Nina Gardner at nina@filice.com.