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COVID-19 Frequently Asked Questions

CARES Act Answers for Retirement Plan Sponsors and Entrepreneurs

Answers From Our Experts

The Leading Retirement Solutions Team wishes everyone health and safety in the midst of COVID and the financial market downturn. Leading Retirement Solutions was built by entrepreneurs, for entrepreneurs and we know and understand the challenges you are facing. As a member of the American Society of Pension Professionals & Actuaries  (ASPPA), we are actively lobbying on your behalf. ASPPA has requested that the IRS provide relief for companies and owners that sponsor retirement plans including SEP/Simple IRA, 401k, 403b, Defined Benefit, Cash Balance, Pension Plan, ESOP, ROBs and others.

Even in the midst of this crisis, our team of industry experts are available to help with your retirement plan related questions. Whether it’s reviewing your plan design, answering questions related to your employees, or making recommendations  based on your changing priorities and needs – we are here for you! You can look forward to frequent updates from us on changing government policies that result in relief for company sponsored retirement plans, helpful tips, and resources for navigating your plan during these uncertain times.

Refer to the Our Latest Updates section to find the topic you're looking for in this guide.

Updates From Washington

3/27/2020:

The CARES Act, signed into law on Friday March 27, 2020, provides aid to companies that sponsor a retirement plan and employees who participate in these plans. The CARES Act enhancements for retirement plans were enacted to assist retirement plan participants by offering a special distribution, expanded loan features and relief from required minimum distributions. These enhancements are important as they are additional benefits that can be made available to participants who are experiencing or will experience financial and other hardships.

The CARES Act offers new and enhanced withdrawal, distribution and loans for your employees. The following information will help you make decisions about adopting the CARES Act enhancements for you and your employees:

CARES Act Distribution

The CARES Act allows for a special distribution with special criteria and modified tax treatment (referred to as the “Cares Act Distribution”). The distribution may be taken from any eligible retirement plan including qualified plans, IRA’s, 403(b) Plans and governmental 457 plans.

  • A qualified individual may take a distribution up to $100,000.00 of their fully vested account balance.
  • Pursuant to these regulations, this opportunity is available until 12/31/2020.
  • The 10% early withdrawal penalty tax and 20% mandatory tax withholding are waived for this type of distribution.
  • Participants of any age may take the distribution.
  • Taxes will still be due, by the participant, but can be paid over a 3 year period.
  • If a participant repays the withdrawn amount back into a qualified retirement plan account, the amount will not be taxed as ordinary income to the participant. Such repayments would not count as a contribution toward IRS mandated annual contribution limits.

 

The CARES Act does not allow for this type of distribution from a Defined Benefit, Cash Balance or Money Purchase Plan.

CARES Act Loan

The CARES Act loan for qualified individuals increases the available loan amount and offers extended loan repayment periods. If your retirement plan currently allows participant loans, a participant can take out a higher loan amount and/or delay repayment of new and existing loans, if they qualify. 

For new participant loan requests:

  • A participant must self-certify they are a qualified individual.
  • New Loans
    • The participant must request the new loan within 180 days of the effective date (March 27, 2020) of the CARES Act.
    • This provision is available for new participant loans made on or before September 23, 2020.
    • The maximum limit for a loan to a qualified individual is increased to 100% of the individuals vested account balance or a maximum amount of $100,000.

For existing participant loans:

  • A participant must self-certify they are a qualified individual.
  • For existing participant loans, participants may increase their loan amount if applicable and/or delay loan repayments for up to 12 months

 

Repayment Suspension (new & existing participant loans):

  • New participant loans: Any new loan taken in the period above may have repayments delayed for up to 12 months, as well.
  • Existing participant loans:  qualified individuals may delay, for up to 12 months, any loan repayment that is due between enactment of the CARES Act on 3/27/2020 and 12/31/2020.
  • If a participant delays payment, their total repayment period is extended by that same amount of time (giving participants longer than the traditional IRS mandated 5 years to repay).

Qualified Individual and Self Certification

A CARES Act distribution or loan is available to a qualified individual for the following reasons:

  • The participant has been diagnosed with the virus (as confirmed by a CDC-approved test);
  • The participant’s spouse or dependent has been diagnosed with the virus; or
  • The participant has suffered financially from the pandemic because (any or all reasons):
    • The participant was laid off, furloughed, quarantined, or had hours reduced.
    • The participant cannot work due to the unavailability of childcare because of the pandemic.
    • The participant’s own business has had to close or reduce hours.

The CARES Act allows a Plan Administrator to rely on a participant’s self-certification that they are a qualified individual. Distributions are also available for beneficiaries of deceased participants.

  • This self-certification requirement applies to the CARES Act Distribution and the CARES Act Loan.
  • No further certification or authentication will be required of the Plan Sponsor/Plan Administrator.
  • LRS will provide distribution and loan forms for this purpose and will require that a participant self-certify their eligibility for the distribution and/or loan.

Required Minimum Distribution (RMD) Suspension

The Required Minimum Distributions normally due for payment during 2020 are not required from many qualified plans. This is intended to prevent affected participants having to liquidate investments now at a significantly reduced value and give time for value to recover.

A required minimum distribution (RMD) is the minimum amount a retirement plan participant must withdraw from their account each year. You generally have to start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA, or retirement plan account when you reach age 72 (70 ½ if you reach 70 ½ before January 1, 2020). Roth IRAs do not require withdrawals until after the death of the owner.

The SECURE Act that became effective on December 20, 2019, substantially changed the RMD requirements.  Pursuant to the SECURE Act, if a retirement plan participant reaches the age of 70½ in 2020 or later you must take your first RMD by April 1 of the year after you reach 72.

The CARES Act has now afforded even greater flexibility for retirement plan participants who may have been required to take an RMD in 2020.

RMD’s are waived for any RMD:

  • Due for payment by April 1 because a participant attained age 70½ during 2019 and the RMD has not been distributed.
  • Applicable to all Required Minimum Distributions for 2020.
  • No RMD’s due for individuals who have been taking RMD’s in previous plan years.
  • Note: No new 70 ½ RMD’s due to changes in SECURE Act.
  • Any RMD’s due in 2020 not already distributed are waived.

Delay in Funding for Single Employer Defined Benefit & Cash Balance Plans

Defined Benefit and Cash Balance plans are being given more time to make contributions that are due for deposit during 2020. Plan sponsors will have additional time to recover reduced revenue from mandatory business shutdowns:

  • The due date for any defined benefit contribution during 2020 is extended to January 1, 2021.
  • Contributions would be related to 2019 plan year administration.

Your Fiduciary Responsibilities:

We are here to help you and will continue to perform compliance requirements related to your company sponsored retirement plan.

Regulations still require that you meet compliance requirements applicable to your company sponsored plan:

Companies and entrepreneurs must timely complete regulatory requirements including the upcoming July 31, 2020 IRS Form 5500 filing deadline for all retirement plans with a December 31st plan year end, until such regulatory relief may be granted otherwise, by the Internal Revenue Service, Department of Labor and/or Congress.

Communicate with your employees and participants about your company sponsored retirement plan:

Timely communication about retirement plan changes is one of the most important requirements related to your company sponsored retirement plan. If you amend your retirement plan, make changes, or if your service providers present you with notices, make sure you transmit those changes and notices to all eligible employees and all accountholders in your retirement plan. In lieu of mailing paper notices, ask us how you can safely transmit information to your workforce.

Investment and other Plan Related Questions from Participants:

It is likely that you have set up your company sponsored retirement plan (especially a 401k or 403b plan) to give participants control of the investments in their accounts. For participants to have control, they must have sufficient information on the specifics of their investment options. Make sure that you (and your retirement plan service providers) are responding to participant inquiries and requests for information in a timely manner. You can also direct them to our recent blog post for more information.

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Employee Contributions & Deferrals:

These contributions are discretionary; an employee can stop contributing to their retirement account at any time. Employee elective deferrals, from their own pay, can be ceased (reduced to zero) by an employee at any time, particularly in a 401(k) or 403(b) plan.

Timely Deposit of Employee & Company Contributions:

Regulations have not changed on the timing of transmitting employee contributions to retirement plan investment accounts. The deposit timing safe harbor from the Department of Labor still applies. Be sure all employee deferrals and loan repayments are transmitted by the usual deadline. The company may have more time to deposit matching and discretionary profit sharing contributions. If more time is needed, check with our team to understand the time available for depositing company contributions.

Company Matching Contributions:

If your priority is to reduce company expenses, you should consider and discuss with your retirement plan service provider if ceasing your company matching program is an available option (regulations may restrict ceasing your matching contribution program mid-year); and if it would be the best thing to do at this time.

If your company wants to cease making contributions (e.g. matching, safe harbor match, non-elective contribution) to the retirement plan, this can generally be done, however, depending on the type of company contribution program in your plan, a 30 day advance notice requirement may apply. You can also change when you make company matching contributions; consider changing contributions made each pay period to the end of this year.

Profit Share Contributions:

Generally, a company profit share contribution is discretionary, and a company can cease making these contributions to a retirement plan at any time.

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Letting Employees Go:  

When making decisions to layoff and/or terminate employees, make sure you understand what will be allowed and/or required of your company.  Some states have work-attached employee layoff programs, which allows an employee to avoid looking for alternative work while also receiving unemployment pay. These programs may or may not result in an effective employment termination for retirement plan purposes demanding continuation of plan benefits.

Termination, Layoffs, Furloughs and More

A common question our team is being asked by employers, “Is my employee terminated and can they get money out of their retirement account.” Not all cessation of employment results in a termination of employment for purposes of a participant getting their money out of the retirement plan.  Additionally, the CARES (Coronavirus Aid, Relief and Economic Security) Act provides for additional flexibility for employees that are still considered employed and/or furloughed, to get access to their retirement accounts.

What is a Severance of Employment?

When determining if an employee is effectively terminated, rather than using terms like layoff, furlough and even termination, rules are based on whether there has been a severance of employment.

Severance of employment is an analysis of facts and circumstances, that considers factors including:

  1. Is it a bona fide/good faith severance;
  2. Is the individual still being treated as an employee for employee benefit program participation purposes or otherwise; and/or
  3. Is there a reasonable expectation that the individual will no perform any more duties for their employer.

Severance of employment results in:

  1. A distributable event for retirement plan participants, depending on what’s allowed by the retirement plan.
  2. May accelerate the due date of a participant’s outstanding loan, depending on retirement plan provisions as well as CARES Act flexibility – extending due date and term of loan repayments for up to one year.
  3. If the former employee is being paid, the plan must credit them with hours of service, up to a maximum of 501 hours.​​​​​​​

If there is no severance of employment:

  1. Pursuant to the CARES Act, employed plan participants may withdraw, penalty free, up to $100,000 between 1/1/2020 and 12/31/2020. The plan sponsor would need to approve this document change and the participant would need to be eligible for this kind of withdrawal.
  2. Loan provisions – can still take advantage of CARES Act flexibility – payments can be suspended for up to 1 year and/or the loan term can be extended for up to 1 year.
  3. If the current employee is being paid (but not performing work), the plan must credit them with hours of service, up to a maximum of 501 hours.
  4. If the current employee is not being paid and not performing work, the plan must credit them with hours of service to prevent a break in service.
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Additional Severence of Employment Information

Retirement plan sponsors will need to decide what CARES Act flexibility they want to adopt for their retirement plan. Sponsors will also need to amend plan documents on or before the last day of the first plan year beginning January 1, 2022, if the choose to utilize the CARES Act flexibility. If more than 20% of eligible employees have had a severance, it may (but not always) trigger a partial plan termination requiring full vesting of all employer contributions. It’s unlikely the IRS would challenge a reasonable determination of employment status especially in light of these significant and extraordinary times.

Hardship Withdrawals and Participant Loans 

Generally, hardship withdrawals are not allowed when an employee is no longer considered employed with your company.  A terminated employee with a participant loan must repay the loan in full unless your plan documents indicate or are amended otherwise.

Distributions & Withdrawals:

Generally, an employee must be on the receiving end of a “severance from service” to withdraw money from their retirement account. A severance from service occurs when an employee either quits, retires, is discharged, or dies. A severance from service also includes a layoff. It may not include work furloughs. Your 401(k) service providers can help you determine if your employees are eligible for a distribution from their retirement plan account.

Employers should understand if an employee is rehired within 12 months of their severance of service, the IRS no longer considers the original departure as a severance of service. Additional requirements like return of distributed amounts to the retirement plan and more may be triggered.

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Hardship Withdrawals & Disaster Relief:

A hardship withdrawal program, if available via your company sponsored retirement plan, allows an employee (including owner) while still employed with your company to take some or all of their account balance from the retirement plan. 

If your company sponsored retirement plan does not allow for hardship withdrawals, your plan may be amendmened to allow for this type of distribution program.

Hardship Updates

In the event that the government (specifically FEMA) declares a disaster and the employee’s residence or place of employment is in an area designated by FEMA as a disaster zone, then a hardship withdrawal may be allowed for any kind of expense and loss (including loss of income) incurred on account of a disaster. Until then, employers need to continue to administer the retirement plan according to the plan documents.

**As of 3/31/2020 FEMA has declared 23 states, 2 territories, and Washington D.C. as “disaster” zones; monitor disaster declaration updates from FEMA at the site below:

FEMA

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Form 5500 Filing Deadline:

The IRS has not extended the Form 5500 filing deadline although we are hoping they will soon. On March 20th, the federal government announced that the April 15th tax deadline is now postponed until July 15th for individuals and corporations.  However, 401k, 403b, Defined Benefit and other retirement plans with a December plan year end are still subject to a July 31 filing deadline. This can be extended to October 15th, 2020 if IRS Form 5558 is filed.

Upcoming SECURE ACT Amendment:

Most company sponsored retirement plans are required, by the IRS, to amend their retirement plan documents during the 2020 calendar year, particularly to allow for the shift of Requirement Minimum Distributions (RMDs) from age 70 to the new required beginning date age of 72.  Leading Retirement Solutions will proactively reach out to you when it is time to initiate the amendment process, this year.

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Reducing Retirement Plan Expenses:

There are various methods for reducing costs related to your retirement plan, such as:

To reduce company paid expenses related to your retirement plan:

  1. Temporarily cease company contributions (match, safe harbor match, profit share). Please contact our team to discuss if this is an available option.
  2. Review how service provider costs related to your retirement plan are paid. 
  3. Speak with us about reallocating third party administration, recordkeeping, audit, insurance e.g. ERISA bond, and other services to be paid by plan assets. 

To reduce the impact of service costs on your participants:

If you want to reduce plan paid costs to reduce the financial burden of the plan for your employees and plan participants, speak with us about reallocating service costs to be company paid.

To reduce costs in other areas of your plan:

There are certain retirement plan related costs that may not be passed on to plan participants. We can help you identify those costs and discuss opportunities for re-allocating costs based on your changing priorities.

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Cash Balance or Defined Benefit Plans:

If you sponsor a Cash Balance Plan or a Defined Benefit Plan at your company, the investment market downturn could be cause for a significant increase in company contribution requirements to bring the plan up to acceptable funding levels. Other plan costs could increase based on the funding level on the last day of 2020, so early contributions may be a good idea. However, if you feel your business may have difficulty meeting funding requirements for the current year, now is the time to act to reduce or to freeze benefit accrual for the current year. This can reduce some of the burden from high contribution costs. Contact your plan administrator for a review and contribution estimate.

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How To Terminate or Freeze Your Plan: 

If you're considering terminating or freezing your current company sponsored plan, you will need to do the following:

  1. Establish a plan termination date.
  2. Update the plan for all changes in the law or plan qualification requirements effective on the plan’s termination date.
  3. Cease employee and company contributions
  4. Provide full vesting of benefits to all affected employees on the termination date.
  5. Notify all plan participants and beneficiaries about the plan termination.

For further assistance please contact LRS.

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Partial Retirement Plan Termination: 

If you lay off or terminate employees, understand what additional retirement plan requirements may be triggered:

  1. Your plan may have a partial termination if more than 20% of your total plan participants are laid off in a particular year.

  2. The law requires all “affected employees” to be fully vested in their account balance as of the date of a full or partial plan termination. They must become 100% vested in all employer contributions (including matching contributions) regardless of the plan’s vesting schedule. Employee salary deferrals are always 100% vested.

  3. An affected employee in a partial termination is generally anyone who left employment for any reason during the plan year in which the partial termination occurred and who still has an account balance under the plan.

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Compliance Check for Plan Operations: 

A retirement plan needs regular care to keep it operating properly. Your plan’s care should include a regular review of your plan’s basic operations, especially if you are marking broad changes within your organization. To complete a Compliance Check of your retirement plan operations, ask an LRS team member for help or use the IRS provided checkup tool

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If you have questions about what you can and should do with your company sponsored retirement plan (e.g. 401k, 403b, Defined Benefit, Pensions, ROBS and other plans) in anticipation of the long term impact of COVID and financial markets, contact our team at service@leadingretirement.com or by following the link below:

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