How the CARES Act Impacts Retirement Plans
We had the opportunity to interview ERISA Attorney Christine Roberts who is a Partner at Santa Barbara, California-based, Mullen & Henzel, L.L.P., regarding how the CARES Act can impact Qualified Retirement Plans and some responsibilities of plan sponsors. We hope you find Chris's expert commentary informative as plan sponsor and plan participants navigate the new world that the CARES Act and COVID-19 have ushered in to the retirement plan space. If you have questions regarding how your retirement plan responsibilities may be impacted, we encourage you to visit Chris's ERISA blog, or you can contact her directly below.
What’s the most important information 401(k) participants should know about the impact of the CARES Act on their 401(k) options?
That they need to check with their employer to confirm whether the employer is making CARES Act relief available under their 401(k) plan. If so then the following may be available to them if they are affected by COVID-19[1] whether in the form of illness of themselves or a family member, or due to job or income loss:
- COVID-19 withdrawal of up to $100,000
- ~Taxable over 3 years (regular income tax applies; withholding may be waived)
- ~10%early distribution penalty tax waived
- ~Eligible for repayment to the source plan or another plan/IRA (treated as a rollover)
- Increased plan loan limit to as high as $100,000
- Postponement of plan loan payments, for up to 1 year, for payments otherwise due between March 27, 2020 and December 31, 2020. This applies to COVID-19 loans and to pre-existing regular plan loans.
Also, if participants do need to take COVID-19 withdrawals or loans, they are “locking in” investment losses when they liquidate investments to create the cash withdrawals/loan proceeds. Those amounts will not enjoy the earnings rebound that generally follows a market downturn. Depending on how close they are to retirement, they should seek expert guidance on how the balance of their plan account is invested to weather the bumpy market that will likely exist for some time.
What are one or two critical questions for participants to ask their employers to figure out their benefit options?
- The availability of COVID-19 relief as described above.
- Whether employers or their service providers can assist with any of the following: investment guidance, budget planning services, financial wellness, health insurance questions, other resources available to employees.
If an employee recently separated from their employer, does the CARES act address their 401(k) or IRA loan or distributions options?
The COVID-19 withdrawal and loan options are not limited to recently separated employees but generally are also available to furloughed or currently employed workers. However, terminated employees are often ineligible to take plan loans out.
What are the scenarios that allow individuals to reverse their 2020 RMDs if taken earlier this year?
- If a participant who turned age 70½ in 2019 took the RMD in 2019, rather than wait until April 2020, current rules do not permit a rollover or other correction of the distribution.
- For participants not affected by COVID-19 who took their distribution in 2020, they have 60 days from the date of distribution to restore the funds to the plan that made the distribution, or to another IRA or other retirement plan.
- If the participant is affected by COVID-19, the 2020 RMD could be classified as COVID-19-related, such that they have up to three years to restore the distribution.
- Note that the RMD waiver for 2020 applies to defined contribution plans such as 401(k) plans and not to defined benefit (traditional pension) plans or cash balance plans.
- Note also that the ability to reverse an RMD from an inherited IRA may exist only if the beneficiary is affected by COVID-19.
Can you explain the impact of Revenue Ruling 2007-43 in today’s world?
- Under this Revenue Ruling, when 20% or more of a plan’s population has been separated form service due to reductions in force or layoffs, there is a presumed partial termination of the plan requiring that all those affected by the partial termination be fully vested in employer contributions under the plan.
- For a 401(k) plan the “population” would be those who are eligible to make salary deferrals even if they do not do so and do not have a plan account.
- Those affected by the partial termination and entitled to full vesting may include employees who voluntarily leave employment during 2020 due to concerns about the company’s viability.
- If you think a partial termination has or may have occurred, consult an ERISA attorney.
What other ERISA compliance issues of significance can become more apparent during this economic downturn as a result of COVID-19?
Orphan and abandoned plans are a concern whenever there is a financial downturn. Plan sponsors that go out of business before they have had a chance to wind down and terminate their retirement plan may leave a plan “orphaned”. This requires a third party to take over distribution of assets under applicable Department of Labor regulations. It is essential that companies that may wind down operations take steps to ensure one of the following actions is taken: 1) Their plan is terminated before they go extinct, or 2) a fiduciary is named to wind down plan assets after the plan sponsor no longer exists. Again, consulting anERISA attorney is advisable in this setting.
What measures do you suggest plan sponsors review, undertake during this period of uncertainty?
They should realize that the decision on whether or not to offer COVID-19 related plan options such as the withdrawals/loan enhancements is a “settlor function” that is not a fiduciary decision, but that communicating about and implementing the decisions does trigger fiduciary duties. Some recordkeepers are treating the COVID-19 plan options as a “default” from which plan sponsors must opt out; most plan sponsors will want to make any and all relief available to participants but need to have their fiduciary hat on when they communicate about these new options and in implementing them under their plan.
Also, plan sponsors may need to reduce or eliminate employer matching and profit sharing contributions during the financial downturn – again – this is a “settlor” function but communication and implementation are fiduciary acts and plan sponsors will want to take care in how these decisions are communicated to participants and implemented.
[1] “Affected by COVID-19” for these purposes includes someone:
Who has been diagnosed with either the SARS-CoV-2 or COVID-19 virus (as confirmed by a test approved by the Centers for Disease Control); Whose spouse or dependent has been so diagnosed; or Who has suffered adverse financial consequences because, as a result of the pandemic, one or more of the following has occurred:
They were laid off, furloughed, quarantined, or had work hours reduced;
They cannot work due to the unavailability of childcare; or
They own a business that has had to close or reduce hours.
Other criteria may be announced by IRS. Plan sponsors may rely on participants’ certification of the criteria.
Christine is a partner at Mullen & Henzell L.L.P, in Santa Barbara, California, which since 1953 has been helping individuals and business owners in the areas of employment law, estate planning, and business/real estate transactions. For over 20 of those years, Christine has helped employers steer a clear path to ERISA compliance, de-mystifying the jargon, and providing practical advice to clients in language that they can understand and act on with assurance. To learn more about Christine and her benefits practice, check the following links or reach out to her at croberts@mullenlaw.com | (805) 966-1501.
Christine’s Firm Bio | ERISA blog, www.eforerisa.com
