COVID-19 Impact on Retirement Plans
In this unprecedented time, we know that many of ABP’s clients and advisors may have questions regarding their plans. To keep you informed of plan options, we have documented some of the questions that we have already received or anticipate receiving during this difficult time.
Employee Deferral Changes
Active employees may want to change or discontinue their deferral contributions at this time. Although many of ABP’s plans were written with the ability to change or discontinue deferrals at any time, you should refer to your Summary Plan Description (SPD) for your specific plan’s details. If your plan incorporates a different timing and there is a desire to change that timing, please contact ABP.
We urge all plan sponsors to continue to make deferral deposits within the 7-day Department of Labor safe harbor timeframe (for small plans). If you have a circumstance that warrants a longer timeframe, such as a layoff in plan related personnel, presumably our current crisis would be the environment in which the DOL would be more accepting of these deposit delays. We don’t anticipate that this would be a long-term exception. We also don’t anticipate that purely economic related conditions will be treated the same. Because deferrals are coming directly out of participant paychecks, a lack of cashflow will not be treated as a valid reason for delay. The DOL has made it clear in the past that participant deferrals are not to be used for cashflow purposes.
Currently, many COVID-19 related hardships may not meet the IRS definition of a hardship withdrawal. The recently amended CARES Act introduced by the Senate does include expansion of a special hardship withdrawal rule for COVID-19 related needs.
Other In-Service withdrawals
Plans can continue to offer non-hardship in-service withdrawal features and can be amended to do so if not currently available.
How does a participant who is temporarily laid off make a loan payment? Plans can be amended to accept repayment by check as opposed to payroll withholding for those employees that may be laid off. Procedures for remitting these personal payments will vary with each plan’s selected financial institution.
Suspension of payments. The current law allows loan payments to be suspended for up to one year for those participants on an unpaid leave of absence. This does not extend the 5-year timeframe for loans to be paid in full. This request must be initiated by the participant. Importantly, we must verify the classification of the employee to ensure that he or she qualifies under the unpaid leave of absence qualifier.
Alternatively, the currently proposed CARES Act allow a one-year suspension of loan repayments for all participants regardless of employment status. Should this be enacted, this provision would provide more relief.
Loan Defaults. If loan repayments are not made, the loan balance will eventually be classified as in default and will become taxable to the participant. Most of ABP’s plans are written to use the longest cure period allowable, ending in a loan default in the calendar quarter following the quarter in which a payment is missed. As an example, if a payment is missed in March, a loan default would not occur until June 30th. This time period provides some opportunity to address these issues, and potentially have a better handle on the anticipated length of employer layoffs, before any taxable event occurs.
If a plan does not currently permit refinancing of existing loans, it can be amended to do so. However, there are specific rules concerning the timing and amounts available for refinancing separate from the overall loan limits.
What if an employee’s paycheck is not enough to cover the loan repayment after other deductions?
This is one of the more difficult situations that can occur with plan loans. We have had clients in the past ask us if it is acceptable to stop deducting repayments if the amounts would eat up all or most of the employee’s paycheck. The issue is that the plan sponsor is obligated by virtue of the loan agreement to deduct those repayments. And by not doing so, they break the terms of the plan loan. However, by enforcing the loan and processing the deduction, they could be putting their participants in a position of further financial hardship. There is no great solution for this set of circumstances. In the past, we have had some plan sponsors choose to put aside the technical considerations in favor of the practical considerations of making sure their employees are not in hardship. The missed loan payments can then be resumed and caught up when the employee returns to a larger paycheck. Or the loan goes into default if regular repayments cannot be resumed.
Safe Harbor Funding and Discontinuance
Some employers may be considering a change in Safe Harbor status to help with cash flow or to avoid future 2020 required contributions.
Deposit Timing. Although plans may currently be written to calculate contributions on a per payroll basis, IRS regulations allow contributions to be deposited less frequently. These contributions under a Safe Harbor Matching feature must be deposited on a quarterly basis. Contributions under a Safe Harbor Nonelective feature must be deposited on an annual basis. This may provide needed business cash flow for some plan sponsors. These changes may be able to be made on an administrative basis and likely do not require a plan amendment.
Discontinuance. Plan sponsors are permitted to discontinue Safe Harbor contributions with 30 days’ notice. Safe Harbor contributions are required through the end of the 30 days. This requires a formal plan amendment and communication to plan participants.
However, depending on the plan’s Top-Heavy status, there may still be additional required contributions unrelated to Safe Harbor. A plan is Top-Heavy if Key employees (generally owners) hold more than 60% of plan assets. In that event, a minimum contribution is required to all participants who are employed as of the end of the year. Safe Harbor plans often get an exemption from the Top-Heavy minimum contribution rules. But if the Safe Harbor contributions are discontinued midyear, that exemption goes away.
The required Top-Heavy contribution is the lesser of the amount that any key employee received (combining deferrals and employer contributions) or 3%. As such, if key employees have already deferred more than 3% of annual pay, there is no way to reduce the requirement that many participants will still need to receive 3% of full year wages. A difference here is that Top Heavy amounts are allocated only to participants employed on the last day of the year and these contributions would be subject to the normal Profit Sharing vesting schedule.