In-Depth: COVID-19 Retirement Q&A
Supplement to COVID-19 Considerations For Your Company’s 401(k) & Other Tax-Qualified Retirement Plans (Barack Ferrazzano Client Alert, March 2020)
Q: Has Congress altered any significant tax-qualified retirement plan rules in response to COVID-19?
A: Yes. On March 27, 2020, Congress passed and the President signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Key provisions in the Act make the following changes to tax-qualified plans: (1) allow qualifying participants to take a “coronavirus-related distribution” of up to $100,000 without the 10% early withdrawal penalty, which participants may repay within three years of the distribution date; (2) allow retirees to suspend required minimum distributions for 2020; and (3) double the maximum loan limit to the greater of $100,000 or the balance of the participant’s account.
Generally, “qualifying participants” include individuals: diagnosed with COVID-19; individuals whose spouse or dependent is diagnosed with COVID-19; and individuals who experience “adverse financial consequences” because of quarantine, furlough or layoff, a reduction in hours, inability to work because of lack of child care because of COVID-19, business closure or reduced operating hours.
Employers should be prepared to amend plans consistent with these requirements upon further guidance from the Treasury Department.
Q: May participants take a hardship withdrawal specifically because of the COVID-19 pandemic?
A: Depending on the participant’s home state, although a hardship withdrawal may be unnecessary in light of the CARES Act provisions discussed above. As part of the 2019 SECURE Act, regulations were amended to designate disasters as a safe harbor financial need. However, the President’s March 13 declaration of a national “emergency” under the Stafford Act did not also declare a “disaster.” To date, qualifying disasters continue to be declared in some but not all states. Whether a nationwide declaration is forthcoming remains to be seen. In the meantime, employers should verify that plan documents have been updated to permit disaster-based hardship withdrawals. Note that participants may be eligible for a hardship withdrawal in light of individual circumstances related to COVID-19 that constitute other qualifying hardships or an immediate and heavy financial need.
Q: How can participants modify or terminate existing elective deferral elections?
A: Follow the regular procedures set forth in the plan document and summary plan description. Plan sponsors may want to consider amending the plan if current provisions are not flexible enough to permit modification or termination of existing deferral elections.
Q: May participants pause participant loan repayments?
A: Yes, in certain circumstances and depending on plan terms. Repayments may be suspended during temporary layoffs and during other unpaid leaves. However, participants should know that any pause generally cannot extend the maximum period for loan repayment (usually, five years). The CARES Act delays for one year the repayment due date for qualifying individuals (see description above) whose due date is between the enactment date and December 31, 2020. Repayment should resume when participants resume working. Any foregone payments will require additional payments or a recalculation of the monthly payment to allow for payoff during the remaining loan period.
Q: May the plan be amended to allow loans or hardship withdrawals?
A: Yes, although employers should be aware that making hardship withdrawals available creates a protected benefit that cannot be eliminated in the future except with respect to future contributions.
Q: May matching or other employer contributions be reduced or suspended?
A: Possibly, depending on the type of employer contribution. Safe harbor matching and nonelective contributions cannot be reduced or suspended unless (1) the annual safe harbor notice informed participants these contributions may be reduced or suspended during the plan year; or (2) the employer is operating at an economic loss. To reduce or suspend an employer contribution for one of these reasons, amendment of the plan document is required, followed by written notice to participants at least thirty days prior to the effective date of the amendment.
Typically, other employer contributions may be reduced or suspended for any reason. If the contribution amount is fully discretionary, an exercise of such discretion is all that is necessary. However, if the contribution amount is determined by a formula (as is the case with most non-safe harbor matching contributions), it may not be possible to reduce or suspend the contribution because employees may have already satisfied requirements for receiving it. Therefore, employers should carefully review plan documents and consult with legal counsel before making such a reduction or suspension. In addition, such a reduction or suspension (if permissible) likely requires amendment of the plan. In all cases, it is advisable to clearly communicate any changes to employees.
Q: Will furloughs or layoffs cause accelerated vesting of unvested contribution accounts?
A: Possibly, if the layoff or furlough qualifies as a partial plan termination. Any significant workforce reduction such as a layoff or furlough that involves a significant number of participants for more than a brief period of time may constitute a partial termination of the plan, which would lead to full vesting of matching and other employer contribution accounts of impacted participants.
Q: When is plan amendment necessary?
A: If the procedures subject to modification are set forth in the plan document, a plan amendment is required. Any plan amendment will also require a summary of material modifications, which must explain to participants the terms of the amendment in plain language. In contrast, if the procedures are part of the plan’s administrative policies, the procedures likely can be changed by administrative action only.