As we continue to weather the COVID-19 crisis, there’s hardly a single facet of American life left unchanged. The inner workings of employee benefit plans are no exception. Employers, plan sponsors, and plan administrators share the responsibility for understanding and either implementing and making plan amendments or opting out of certain plan provisions, as appropriate. To ensure our clients understand exactly what relief recent legislation has provided and the related plan responsibilities, we want to take a look at some CARES Act provisions that specifically target you as a plan employer, administrator, or sponsor, as well as your plan participants.
Provisions for Plan Distributions
Coronavirus-Related Distributions – Distributions from eligible retirement plans made prior to age 59 ½ are generally subject to mandatory income tax withholdings, the income tax itself, and a 10% early distribution penalty. However, the CARES Act allows for coronavirus-related distributions up to the lesser of $100,000 or the participant’s account balance with no 10% penalty and no required income tax withholdings, regardless of age. Eligible plans under the CARES Act legislation include qualified 401(k) plans, IRAs, governmental 457(b) plans, ESOPs, and 403(b) plans. If this provision is adopted, plan administrators should note that participants must be notified that withholding may be waived or be subject to penalties.
A “Coronavirus-related” distribution is a distribution made between January 1, 2020, and December 31, 2020, based on the participant’s self-certification that they, their spouse, and/or their dependent(s) have contracted the virus, or the participant is suffering a financial hardship resulting from coronavirus due to quarantine, furlough, layoff, lack of child care, or a personal business closure or reduction in operations. Plan sponsors do not need to verify, only the participant’s self-certification is required. Distributions to beneficiaries of deceased participants and alternate payees are also available.
Further, if the participant repays the amount of the distribution into a retirement plan within 3 years, it is not subject to income tax. Repayments may be made to the plan from which the distribution was made, or to a new 401(k), qualified plan, or IRA. Plan administrators must maintain accurate, detailed records for both distributions and repayments for IRS purposes.If the participant is unable or unwilling to repay the distribution within 3 years, then it is subject to income tax; however, it can be recognized ratably over the 3 years.
Like most CARES Act provisions, plans may choose not to amend, or opt in. ESOPs, for example, which technically allow such provisions, usually do not implement them in their plan based on additional complexities that may cause unintended issues.
Provision for Loan Limit Increase
In general, participants in 401(k) plans have the ability to receive a loan from their account of up to 50% of the balance for a maximum of $50,000. However, the CARES Act allows 401(k) plans to increase that amount for qualifying individuals – defined similarly as those individuals qualified for Coronavirus-related distributions – to 100% for a maximum of $100,000 for loans taken through September 22, 2020. New or outstanding loans are able to be repaid over an additional year, and any loan payment due between March 27, 2020, and December 31, 2020, is delayed for one year, with interest continuing to accrue. When filing Federal Forms 1099R, plan sponsors and service providers must ensure these loans are not reported as being in default during the extended period for repayment. Plan administrators and sponsors must be diligent in tracking, recordkeeping, and in reviewing existing plan terms. As with the contributions changes above, this provision is also “opt-in”. It is important to note that this legislation does not automatically change other plan terms. So, if your plan does not allow participants to take out an additional loan while another is in repayment, for example, tracking participant accounts and ensuring only a single loan is active per participant is critical.
Provision Suspending RMD Requirement for Certain Retirement Plans and Accounts
Participants reaching age 70½ prior to 2019 would have been required to take distributions from certain defined contribution qualified plans, 403(b) plans, IRAs, and governmental 457(b) plans in 2020. These distributions are based on a combination of the balance in these accounts and a life expectancy factor from IRS tables. Among the tax provisions in the CARES Act, this requirement to receive an annual distribution for 2020 has been suspended.
Unlike the other CARES Act provisions for employee benefit plans, this waiver is not something a plan may choose to opt out of. Plans must be amended to show the implementation of this change. Compliance must be upheld for 2020, with plan amendments being adopted no later than the last day of the plan year beginning in 2022 (2024 for governmental plans).
Other Notes for Employer Contributions
2019 C Corporation and Sole Proprietor Deductions – This legislation extends the deadline for employer contributions for amounts to be deducted on these returns to July 15, 2020, to match the postponed original return due date.
Single Employer Defined Benefit Funding – For calendar year plans, the deadline is now January 1, 2021, for 2020 quarterly and year-end single employer defined benefit plan contributions.
Safe Harbor – Whether matching or non-elective, safe harbor contributions may be suspended mid-year if the plan provided notice at least 30 days prior to the beginning of the plan year that contained language that this may occur or if, for the plan year, the plan sponsor is operating at an economic loss. To suspend safe harbor contributions for a period of 30 days, the plan must pass ADP testing for the year and must provide a 30-day advance notice to participants.
Provisions for Employee Stock Ownership Plans (ESOPs)
The CARES Act includes ESOPs among those eligible to apply for Paycheck Protection Program (PPP) Loans and for the SBA’s Emergency Injury Disaster Loan (EIDL) Program. Please visit our COVID-19 Financial Resource and Tax Center for details about these programs.
Partial Plan Termination
If 20% or more of plan participants have been terminated due to lay-offs and closures, plan sponsors may be subject to partial plan termination rules. If so, the plan must provide accelerated 100% vesting to those terminated participants.
5500 Reporting Deadline
At this time, while the reporting deadlines originally due between April 1 and July 15 have been postponed to July 15th, calendar year plans have not been postponed. Federal Forms 5500, 5558, 5330, and 8955 are still due July 31, 2020. The DOL has been granted authority by the CARES Act to change these due dates, so there is still a possibility they may be extended.
ARB is Here to Help
As new regulations are issued, finding and working with a firm with extensive experience in employee benefit plan compliance is particularly important. ARB is dedicated to updating our clients and community as the legislative implications of the COVID-19 pandemic continue to unfold, and ARB’s Employee Benefits Services Group is dedicated to all your unique plan needs. We are a proud member of the AICPA Employee Benefit Plan Audit Quality Center.
Contact us for more information or for your other accounting and business advisory needs, and visit our COVID-19 Financial Resource and Tax Center for additional information on related tax and financial matters.
by Benjamin Lord, CPA, CCIFP