Tags: Employee Benefit Plans

Tracking the Trends: Retirement Plan Benefits

Within the past couple of years, there has been a flurry of laws and regulations enacted to address the challenges workers face in saving sufficiently for retirement and provided short-term COVID-19 pandemic relief (financial and otherwise). Several legislative changes impacted retirement benefits offered by employers where the legislators were attempting to address key issues facing today’s workers through the incorporation of new retirement plan provisions.

Improving the retirement savings rate

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 included several provisions intended to improve the retirement savings rate for workers. One change requires plan sponsors to provide each participant with two separate examples illustrating their account balance converted to a lifetime income product. The hypothetical examples are intended to help participants recognize whether they are on track to generate sufficient income to fund their retirement and to better understand how their savings translates into an estimated monthly dollar amount.  The participant can then use this information to better plan their savings rates, if needed.

The SECURE Act also provided a safe harbor pathway for 401(k) plans to offer annuities (perhaps not coincidentally as some anticipate an increased demand for annuities or other products that provide lifetime income). A recently introduced bill—dubbed SECURE 2.0—would also ease restrictions on Qualified Longevity Annuity Contracts (QLACs), if passed.

When considering adding lifetime income benefit options, employers should assess whether this strategy is a good fit for the organization and its employees. Adequate investor education is crucial when incorporating these options to ensure participants are fully aware of the costs, benefits, and risks associated with annuities.

Enhancing access to retirement funds while also plugging the “leaks”

While retirement plans allow for in-service withdrawals for serious financial hardships and participant loans for significant expenditures, many workers perceive retirement funds as their most viable option to cover routine expenses and budget shortfalls. Even prior to the COVID-19 pandemic, it was estimated that more than a third of Americans would be unable to manage a $400 emergency expense, according to 2019 data from the Federal Reserve.

With the pandemic spurring an increased need for loan and withdrawal assistance, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (passed in March 2020) temporarily eased defined contribution loan, withdrawal, and repayment rules for participants affected by the pandemic. While most of the provisions were discretionary, a significant number of employers adopted them. A November 2020 report from the Plan Sponsor Council of America (PSCA) showed that about a third of employers offered increases in plan loan. About a quarter of plan sponsors noticed an uptick in loans since the onset of the pandemic, while more than a third saw an increase in withdrawals.

  • Increased participant access to retirement funds is a concern for the long-term impact on retirement readiness. This so-called retirement fund “leakage” (which occurs through early withdrawals for hardship, participant loans taken but not repaid, and other cash-outs) represents a significant challenge to building workers’ retirement preparedness. Some employers are incorporating special tactics and tools to discourage participants from using their retirement plan accounts as “rainy-day” funds, including:
  • Greater restrictions and limits on participant loans (including limits on the number of loans and allowing loans only for serious financial hardships)
  • Use of sidecar savings accounts, which are savings accounts linked to the participant’s retirement plan account
  • Offering an employee financial wellness program
  • Encouraging use of alternative sources of funds or borrowings
Assisting with student loan debts

Student loan debt is a crushing burden for many American workers: Americans carry a total of $1.7 trillion in student loan debt, according to Federal Reserve data. The CARES Act provided some temporary relief through suspension of repayments and interest accruals (through a zero percent interest rate) on federal loans through September 30, 2021. The Act’s provision allowing employers to pay up to $5,250 toward an employee’s student loans as a tax-free benefit was recently extended through 2025 by the Consolidated Appropriations Act (CAA). The proposed SECURE 2.0 legislation also includes a provision allowing employers to make matching contributions to employee 401(k) plans based on their student loan repayments. 

These offerings may be attractive as an approach to attain and retain workforce talent, but be sure to realistically consider what portion of the employer’s workforce would actually benefit from this assistance. Employers interested in helping employees manage their student loan debt should work with service providers to understand the various tools available and investigate any potential downsides of the benefit (which can be expensive).

Monitor legislation and trends while preparing for change

Changes and trends in retirement benefits are often driven by legislative or regulatory action. Since retirement plan solutions are often developed as a direct response to legislation, we encourage employers to monitor recent and ongoing legislation for temporary or optional provisions that could become permanent components of retirement benefits.

The axiom “change brings opportunity” is a notable reminder as employers face today’s evolving workforce and workplace. Employers have an opportunity to use these legislative changes to redesign retirement benefit offerings to better meet employee needs as well as to further their goals and objectives.

Written by Beth Garner and Joanne Szupka. Copyright © 2021 BDO USA, LLP. All rights reserved. www.bdo.com

If you have questions about employee benefit plans, please reach out to Kevin Hamaker for more information.

Tags: Employee Benefit Plans

SECURE Act Guidance for Safe Harbor Retirement Plans

Employers now have more flexibility in adding or amending safe harbor 401(k) or 403(b) plans, thanks to the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act and subsequent guidance from the Internal Revenue Service (IRS). These changes should increase access to the benefits that safe harbor plans offer, such as avoiding administrative costs and burdens of performing certain nondiscrimination tests and strengthening retirement readiness thanks to meaningful employer contributions.

We outline the most significant changes that the SECURE Act made to safe harbor plans. We also explain why plan sponsors should talk with their advisors now about amendments that they may need to make to their plan documents to comply with these SECURE Act changes.

Mid-year and Retroactive Adoption of Safe Harbor Plans

Before the new law, plan sponsors had to adopt safe harbor plans before the beginning of the plan year. Now, plan sponsors can retroactively convert a traditional 401(k) plan to a safe harbor plan that uses employer nonelective contributions.

This option is particularly helpful for plan sponsors that realize mid-year that their traditional plan might not pass nondiscrimination testing for contributions on behalf of highly and non-highly compensated employees. As a reminder, plans that fail nondiscrimination testing generally return a portion of highly compensated employees’ contributions to the employee, which are subject to income tax.   

Plans now have until 31 days before the end of the current plan year to retroactively implement a safe harbor plan that makes employer nonelective contributions of at least 3% to all eligible employees. If plan sponsors miss this deadline, they can still retroactively implement a safe harbor plan until the last day of the following plan year, but at this point the minimum nonelective contribution increases to 4%.

Elimination of Annual Notice Requirements for Nonelective Safe Harbor Plans

Before the SECURE Act, plan sponsors needed to send participants annual notices outlining the safe harbor contributions. The IRS guidance clarified that plans that use nonelective contributions to satisfy the safe harbor requirement no longer need to send these annual notices. This change should help reduce administrative burdens for plan sponsors that use the nonelective contribution option. It is important to note, however, that safe harbor plans that use matching contributions must still send the annual notices.

Increased Auto-escalation Contribution Cap

Plan sponsors that automatically enroll participants into a safe harbor plan that uses a qualified automatic contribution arrangement (QACA) must default the employee’s contribution to at least 3% of the employee’s pay with an annual increase of 1% to at least 6%. The automatic escalation of the employee’s contribution previously was capped at a maximum of 10%, but the SECURE Act increased that limit to 15%. Plan sponsors can choose to stop the auto-escalation at an amount lower than 15%, however, as this increase is not a required change. This higher limit could be especially helpful in enhancing the retirement readiness of employees who tend to put their retirement savings on autopilot.


Start Conversations About Safe Harbor Plan Amendments Now

Plan sponsors that use safe harbor plans—or may consider adopting one retroactively—should start conversations with their third-party administrators and other relevant service providers about possible amendments to their plan documents. Many safe harbor amendments, related to SECURE, are due by the end of the first plan year starting in 2022.

Although plans have until the last day of the next plan year to retroactively implement a safe harbor plan using employer nonelective contributions, doing so at least 31 days before the end of the current year will save one percentage point per employee (3% vs. 4%). So now is the time to start doing the necessary calculations to see whether your plan is in danger of not passing nondiscrimination testing.

Written by Beth Garner and Nicole Parnell. Copyright © 2021 BDO USA, LLP. All rights reserved. www.bdo.com

If you have questions about safe harbor retirement plans or other EBP issues, please reach out to Kevin Hamaker for more information.

Tags: Employee Benefit Plans

Expect some changes for your next employee benefit plan audit

Employee benefit plan (EBP) administrators should be aware of some changes that will go into effect soon.

After Dec. 15, 2021, EBP audits will be much different than they were in the past. Due to recent changes by the American Institute of CPAs (AICPA), EBP plan managers will receive more comprehensive information from auditors.

This is good news for managers who are wishing for more transparency. The new audit reports will include an explanation of responsibilities with financial statements, include a statement about Department of Labor (DOL) conformity, and provide the scope and nature of audits formerly known as “limited scope” audits.

All new audits will include a two-pronged approach with enhanced performance standards. Some standards include acknowledgement of management responsibilities, better understanding of the plan, identifying plan provisions, determining compliance, considering reporting accuracy, identifying possible financial statement inconsistencies, and evaluating certification assessment.

The new reports will allow managers and plan administrators to better understand any inconsistencies or issues with the EBP. Rest assured that auditors will be well trained in the new standards to provide you with the most transparent, comprehensive audit possible.

If you have questions about the new audit standards or other EBP issues, please reach out to Kevin Hamaker for more information.

Tags: Employee Benefit Plans

Consolidated Appropriations Act: What Plan Sponsors Need to Know About Retirement Plan Relief

The Consolidated Appropriations Act, 2021 (CAA), which was enacted on December 27, 2020, is mostly known for the $900 billion it provided in additional stimulus funding for pandemic relief. Additionally, the law contains several useful provisions for retirement plans, including non-COVID disaster emergency relief, multiemployer and defined benefit plan changes, and updates to partial plan terminations. All of these provisions are discretionary, and have very narrow applicability. Regardless, plan sponsors should take the time to understand the relevant parts of the law and see whether the various provisions might benefit their organizations and plan participants.

Non-COVID-Related Disaster Relief

The CAA allows (but does not require) special retirement plan distributions for non-COVID major disasters (such as the 2020 Gulf Coast hurricanes and California wildfires) that occurred between December 28, 2019 and December 27, 2020 (the date the CAA was enacted), so long as the disaster declaration occurs no later than 60 days after the CAA was enacted. Participants whose principal residence was within the disaster area and who sustained an economic loss as a result of the disaster have until June 25, 2021 (180 days after the CAA was enacted) to receive these special CAA disaster distributions. It is important to note that this law does not extend disaster relief outlined in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, but it does mirror aid offered for previous natural disasters. The law allows organizations to amend their 401(k), 403(b) or 457(b) plans to permit qualified participants living in the declared disaster area to obtain special relief using the following methods:

  • Disaster-related distributions: Qualified participants in defined contribution retirement plans and individual retirement accounts (IRA) may take up to $100,000 out of their accounts for each separate disaster without incurring the 10% early withdrawal fee. Although such distributions are taxable, they may be repaid in full or in part over a three-year period beginning on the distribution date (and such repayments will be treated as rollover contributions).
  • Plan loan relief: Similar to the CARES Act provision, participants can borrow the lesser of 100% of the vested account balance or $100,000 for each separate disaster.
  • Loan repayments: Repayments on the aforementioned loans may be suspended for up to one year if the repayment of the loan would have normally been due on the first day of the disaster through 180 days after the last day of the disaster.  
  • Recontribution of hardship distributions for home purchases: Qualified participants who took a distribution to buy or reconstruct a home and were unable to use some or all of the funds can return those funds to their accounts. The funds must have been received no more than 180 days before and up to 30 days after the qualified disaster.

In general, plan sponsors interested in adopting all or some of these changes should amend their plans on or before the last day of the first plan year beginning on or after January 1, 2022.

Money Purchase Plan Distributions Qualify for COVID-Related Distributions (CRDs)

The CAA reverses Internal Revenue Service (IRS) Notice 2020-50, which said in-service distributions from money purchase pension plans did not qualify as a CRD. The change may have come too late for plan sponsors that denied CRDs based on the IRS’s initial notice, but it could reassure others who altered their plans to help participants.

Relief for Overfunded Pension Plans

The Internal Revenue Code (IRC) Section 420 says plan sponsors with overfunded defined benefit plans can make a future transfer of that surplus to retiree health and/or insurance accounts. Because of market volatility over the past year, pension funding may have declined, so the CAA allows plan sponsors to reverse their planned, future Section 420 transfers.

In-Service Distributions for Specific Trade Multiemployer Plans

IRC Section 401(a)(36) provides incentives for phased retirement programs by allowing in-service distributions from multiemployer plans for active/working participants age 59½ or older. The CAA reduces this age requirement to 55 for participants in multiemployer plans from building and construction industries. One additional requirement: participants must have been in the plan on or before April 30, 2013.

Partial Plan Terminations

The CAA creates a safe harbor to protect plans that might otherwise experience a partial plan termination. Before, a partial plan termination would have generally occurred when 20% or more of employees participating in a defined benefit or defined contribution plan were involuntarily terminated from employment without full vesting during a plan year (or over several plan years). The CAA provides that if the number of active participants covered by the plan on March 31, 2021 is at least 80% of the number of active participants covered by the plan on March 13, 2020, the plan will not be treated as having a partial termination. The relief is based on the total number of active participants, so employers do not have to rehire the same workers who were laid off.


The CAA offers many tools plan sponsors can use to help ease participants’ financial strain. It is important to read the details in the law’s provisions and pay attention to qualifications and deadlines. Plan sponsors interested in adopting any aspects of this relief should reach out to the plan’s service providers to see whether immediate adjustments are needed to existing plan processes.

Our professionals can examine retirement plans and assist in determining whether the CAA provisions might benefit your organization’s circumstances.

Tags: Employee Benefit Plans

Hardship Distributions: What Retirement Plan Sponsors Need to Know about Complying with Recent Changes

Efforts to keep up with the myriad of challenges that retirement plan sponsors faced in 2020 may have caused some to overlook significant changes related to hardship distributions that were enacted before the onset of the COVID-19 pandemic.
These changes are designed to make it easier for participants to access funds from their 401(k) plans if they are experiencing significant financial hardship, and several changes apply to 403(b) plans as well. Some of these provisions were optional from 2018 to 2019 but became mandatory in 2020 for plan sponsors that chose to allow hardship distributions.
Now is the time for plan sponsors to examine whether they are complying with these changes in how they administer their plans and whether their plan documents accurately reflect these changes.

Background on Hardship Distribution Rule Changes

Plans are allowed—but not required—to offer taxable, in-service hardship distributions to participants who demonstrate an “immediate and heavy financial need” that could be satisfied only by taking money from their retirement accounts. In the past, that need was determined by facts and circumstances and certain safe harbors built into the law.

Over the past several years, legislation (e.g., the Tax Cuts and Jobs Act of 2017 and the Bipartisan Budget Act of 2018) and Internal Revenue Service (IRS) regulations have introduced changes to make it easier for participants to withdraw funds from their accounts via hardship distributions.

Significant Hardship Distribution Provisions Now in Effect

The most significant changes related to hardship distributions that are now in effect include:

Elimination of six-month suspension on contributions (mandatory): 

Previously, plan sponsors were required to suspend participant contributions for six months after the participant took a hardship distribution. Some plan sponsors viewed this suspension as a way to help participants seriously consider the consequences of taking a distribution on their retirement savings, and not view their 401(k) as an ATM. For hardship distributions made on or after January 1, 2020, plan sponsors cannot impose the six-month suspension and must allow participants to immediately contribute to their retirement accounts. This change was optional in 2019 but became mandatory in 2020.

Expanded safe harbors (mandatory): 

To determine whether participants qualify for hardship distributions, plans can use the hardship safe harbor test and/or the hardship facts and circumstances without regard to any safe harbors. Many plans include both options for maximum flexibility. Previously, there were six safe harbors that plan sponsors could use to determine whether participants qualify for hardship distributions; these safe harbors were available if the participant needed funds to pay for medical expenses, home purchases, college tuition, funeral expenses and home casualty repairs, as well as to prevent eviction or foreclosure. The new rules add a seventh safe harbor to this list: disaster-related expenses of participants who live in a federally declared disaster area. Plan sponsors had the option of including this as a safe harbor in 2019, but its inclusion became mandatory in 2020.

Three-part test replaces some facts-and-circumstances determinations (mandatory): 

Previously, plan sponsors had to evaluate certain facts and circumstances to determine whether a participant qualified for a hardship distribution. For hardship distributions made on or after January 1, 2020, the new rules allow employees to self-certify that: 1) distributions do not exceed the amount the employee needs; 2) participants exhausted other resources, including deferred compensation; and 3) participants do not have reasonably available assets to take care of their needs.
Elimination of loan requirement (optional): 

Previously, participants had to have taken the maximum allowed loans from their plans before being allowed to permanently withdraw funds via a hardship distribution. Now plan sponsors can—but are not required to—allow participants to take a hardship distribution without first having to take a loan.
Expanded sources of funds for hardship distributions (optional): 

Plan sponsors now can—but are not required to—allow hardship distributions to be made from Qualified Non-Elective Employer Contributions (QNECs), Qualified Matching Contributions (QMACs), and traditional and Qualified Automatic Contribution Arrangement (QACA) safe harbor contributions and earnings.


Ensure Operational and Plan Document Alignment Before December 31, 2021 Deadline
Plan sponsors need to be aware that some of the changes discussed above were optional in 2018 and 2019 but became mandatory in 2020, while others remain optional. This creates a confusing situation for plan sponsors as they work to comply with these changes—especially amid all of the other changes related to the pandemic.
Regardless, plan sponsors need to understand the hardship distribution-related changes and comply with them, both in terms of how they operate their plans and how they are reflected in the plan document. Plan sponsors have until December 31, 2021 to amend their documents to reflect these changes. In addition, it is important to notify participants about these changes.
Plan sponsors, even those that use preapproved plans, should meet with their service providers and advisors to review the current plan operations and plan document to identify any areas that are not aligned with the new rules. Lastly, while it is better to bring the plan in compliance as soon as possible, the IRS also has its Employee Plans Compliance Resolution System to fix errors found in retirement plans.

Your representative can help examine your plan to determine whether it needs amendments to its hardship distribution process and plan document.

Every situation is different and unique. If you have questions about distributions and would like to speak to an accounting professional, please contact BSB today. We will help you plan according to your specific circumstances.

Tags: Employee Benefit Plans

Correcting Potential Errors Relating to CARES Act Loans

During the first year of the COVID-19 pandemic, Congress provided plan sponsors with a broad toolkit to help employees access retirement assets and manage loan repayments. However, many of the provisions associated with retirement plan loans in the Coronavirus Aid, Relief and Economic Security (CARES) Act have now expired. Plan sponsors should work with their service providers to ensure that loans are being administered accordingly—or take advantage of federal self-correcting programs to get retirement plan loans back on track.

Review of CARES Act Loan Provisions

The CARES Act allowed employers to increase the amount participants could borrow from their 401(k), 403(b) or 457 plans. Previously, the limit was the lesser of $50,000 or 50% of the vested balance, but during the period March 27, 2020 to September 22, 2020, participants with a valid COVID-19-related reason could borrow the lesser of $100,000 or 100% of the vested balance.

A second provision allowed participants to suspend repayments on any outstanding plan loan between March 27 and December 31, 2020 if they were affected by the pandemic. The CARES Act also extended the repayment term for loans (usually five years) by an additional year. Repayment schedules needed to be re-amortized (including interest incurred during the suspension of repayments) and resumed in January 2021.

Possible Errors—And How to Correct Them

The CARES Act included many moving parts and different deadlines related to loans. As a result, many plan sponsors—or their third-party service providers—may have made errors related to participant loans, including missing important cutoff or restart dates. For example, many 401(k) loans are initiated by the participant electronically and often solely through the service provider’s platform—not through the employer. It is possible that some of these service providers may have continued making loans up to the higher CARES Act limits after the September 22, 2020 deadline. Similarly, service providers may not have properly re-amortized loans that were suspended during the nine-month period allowed by the CARES Act (using the outstanding principal and accrued interest), and some participants may not have resumed making repayments at the beginning of 2021.

Plan sponsors should review IRS Notice 2020-50, which explains the qualifications and deadlines for CARES Act loans. If an error is discovered, the IRS and the Department of Labor (DOL) have correction programs that can help plan sponsors correct errors and avoid disqualification and/or severe penalties.

The IRS’s Employee Plans Compliance Resolution System (EPCRS) offers three ways to resolve problems; the level of plan failure determines the route employers need to take to resolve the issue. In addition, employers may need to address errors using the DOL’s Voluntary Fiduciary Correction Program (VFCP). This self-correction program addresses 19 different prohibited transactions, including participant loans that fail to comply with plan provisions for amount, duration or level of amortization.   

Fiduciary Duty Ultimately Falls on Plan Sponsor

Part of a plan sponsor’s fiduciary duty is to select service providers wisely and monitor whether they are complying with the plan document and existing laws. Most service providers disavow fiduciary status, so, in many cases, the employer is ultimately responsible for ensuring that the plan operates in compliance with its terms and applicable law. Failure to fulfill this responsibility could lead to severe consequences.
Plan sponsors should review participant loans and work with service providers to ensure that the loan process has been managed in accordance with the changing federal guidelines. If plan sponsors discover an error, they should document the issue as thoroughly as possible (including how the pandemic may have contributed to the oversight) and turn to the IRS and DOL self-correction programs.

Every situation is different and unique. If you have questions about CARES Act Loans and would like to speak to an accounting professional, please contact BSB today. We will help you plan according to your specific circumstances.

Tags: Employee Benefit Plans

CARES Act Relaxes Qualified Plan and Employee Benefit Rules

As the number of employers and employees impacted by the novel coronavirus (COVID-19) grows each day, employers with workplace retirement plans may find that employees may be looking to those plans now more than ever to help cover financial hardships they are experiencing. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (H.R. 748) includes several relief provisions for tax-qualified retirement plans, expands health care flexible spending accounts so funds can be used for over-the-counter items, clarifies some health insurance plan questions, and, through year-end, allows employers to reimburse employees for student loan payments tax-free. This alert explains those items. Further guidance will be needed from the IRS and DOL to answer many open questions about how these relief provisions are intended to work.

Defined Benefit (DB) Retirement Plans

Although it is not clear, based on past practices, the IRS may require employers to make an election to use the provisions described below. Plan amendments memorializing those elections would be needed by January 1, 2022.

Funding Relief. Many employers who sponsor defined benefit (DB) retirement plans (including cash balance plans) are facing large contribution requirements due to very low interest rates and a volatile stock market. The CARES Act provides short-term relief for single-employer DB plans. Specifically, employers have until January 1, 2021, to make any minimum required contributions that were originally due during 2020. The relief applies to quarterly contributions and any year-end contributions, regardless of plan year. When paid, contributions will need to include interest for the late payment.

AFTAP Relief. Also, when determining whether Internal Revenue Code (IRC) Section 436 benefit restrictions apply to any plan year that includes the 2020 calendar year, sponsors can (but are not required to) choose to use the plan’s adjusted funding target attainment percentage (AFTAP) for the plan year ending in 2019. This could help employers avoid freezing benefits and continue offering lump sums and other accelerated payment forms in 2020, even if the plan’s funded status significantly declined due to COVID-19.

RMDs Not Waived for DB Plans. DB plans are not eligible for 2020 RMD waivers (that relief is only available for defined contribution plans (see below)).

Defined Contribution (DC) Retirement Plans

Coronavirus-Related Distributions and Expanded Plan Loans. Employers who have DC plans — like a 401(k) plan or 403(b) plan — can let participants take up to $100,000 in “coronavirus-related distributions” by December 31, 2020. The distributions would be exempt from the 10% early withdrawal penalty and taxable over three years. Participants can take up to three years to repay all or any part of those distributions (and the repayment would be treated as a tax-free rollover when repaid to the plan).

From March 27 to September 23, 2020 (i.e., for 180 days after the CARES Act became law), “qualified individuals” can borrow up to the lesser of $100,000 (instead of just $50,000) or 100% of their entire vested account balance (instead of just 50%). For all new or existing plan loans to an affected participant, repayments due before December 31, 2020, may be delayed one year (but interest is charged during the delay). Also, the one-year delay would not count toward the maximum five-year repayment period for plan loans.

These special “coronavirus-related distributions” and expanded plan loan provisions are available to “qualified individuals,” which means any participant who self-certifies that he or she:

  • Has been diagnosed with SARS-CoV-2 or COVID-19 (with a test approved by the Centers for Disease Control and Prevention);
  • Has a spouse or dependent who has been diagnosed with SARS-CoV-2 or COVID-19 (with a test approved by the Centers for Disease Control and Prevention); or
  • Has experienced adverse financial consequences from being quarantined, furloughed or laid off; having work hours reduced; being unable to work due to lack of child care; closing or reducing the hours of a business owned or operated by the individual; or from other factors, as determined by the Treasury Secretary.

Insight: When former employees no longer have payments made via payroll deductions the loans frequently go into default, resulting in taxable income for the participant at the end of the calendar quarter following the default date and a Form 1099-R would be issued showing the loan balance as taxable income for the year. However, the CARES Act appears to provide a one-year grace period for any loans that were outstanding on or after March 27, 2020. It seems that this one-year extension could delay the income inclusion for one year if a participant with an outstanding loan would otherwise default on the loan due to nonpayment including loss of employment due to a COVID-19 related business closure. To prevent such loan defaults, employers may want to amend the loan documents and/or loan policy so that affected participants can take advantage of the one-year delay even if the participant’s employment is terminated or if the participant is laid off.

Participants that don’t qualify for “coronavirus-related distributions” may qualify for a regular “hardship” withdrawal due to an immediate and heavy financial need, if the plan allows. There are many situations that qualify a participant for regular hardship withdrawals, including expenses or loss of income incurred due to a disaster declared by the Federal Emergency Management Agency, also known as FEMA. Regular hardship withdrawals cannot be repaid to the plan, must be taken into income in the year distributed, and are subject to the 10% early withdrawal penalty (although they are not subject to 20% withholding). Generally, DC plans may also allow in-service distributions for participants who are over age 59½ and may allow vested employer contributions to be withdrawn under a “5 year” or “2 year” rule, so long as the plan document allows it (or is amended to allow it).

2020 Required Minimum Distributions (RMDs) Suspended. The CARES Act waives all 2020 RMDs from DC plans (and IRAs). That waiver includes initial payments to participants who turned age 70½ in 2019 and who did not take their initial RMD last year because they had a grace period until April 1, 2020. The RMD relief does not apply to DB plan participants.

Plan Amendments. Employers can immediately implement the provisions provided by the CARES Act but generally have until the end of the first plan year beginning on or after January 1, 2022, to amend their DC plans for this relief. Amendments to adopt provisions that are not included in the CARES Act require amendment by December 31, 2020.

Insight: This deadline appears to be the same for individually designed DC plans and for IRS pre-approved DC plans

What Should Retirement Plan Sponsors Do Now?

Employers who sponsor workplace retirement plans should review plan procedures to determine if any changes are needed to implement the CARES Act. For example:

  • For DC plans that will allow “coronavirus-related distributions” in 2020, a new distribution code would be needed, so that those distributions are not subject to the 10% early distribution penalty tax or the mandatory 20% withholding that would otherwise apply. If employers have more than one DC plan in their controlled group, procedures are needed so that the amount of such distributions made to any individual does not exceed a total of $100,000. These procedures would be similar to those for plans that made qualified disaster distributions over the past few years for certain hurricanes, floods or wildfires. If the DC plan will allow coronavirus-related distributions to be repaid to the plan, procedures are needed to treat those as rollover contributions and to limit the amount of such repayments to the amount of coronavirus-related distributions that the employee took from all DC plans in the controlled group.
  • If a DC plan sponsor wants to increase the maximum plan loan amounts available under the plans during 2020, existing plan loan procedures would need to be updated to allow for that increase. Plan sponsors who limit how many outstanding loans a participant can have at any time may want to increase that limit to allow participants to use the increased loan limits. Permissible one-year delays in loan repayments should be documented (such as updating amortization schedules), so that loans will not go into default. DC plans that do not currently allow participant plan loans could be amended to add them.
  • DC plan sponsors will need to update their plan operation immediately for the waived 2020 RMD distributions. Plans would use similar procedures as were used when 2009 RMD payments were waived after the 2008 economic crisis.
  • The plan’s definitions of covered compensation should be reviewed to ensure it is aligned with the sponsor’s intent, especially with regard to determining if employee assistance and paid leave will be subject to employees’ deferral elections and employer contributions.

Employers may also want to remind participants that they can change elective deferral amounts at any time in accordance with the plan document and to inform them how to take advantage of any changes in plan operations or procedures due to the CARES Act.

Health Plans

Tax-Free Over-the-Counter Products. The CARES Act allows employees to use funds in health care flexible savings accounts (FSAs) to purchase over-the-counter (OTC) medical products, including those needed in quarantine and social distancing, without a prescription. This change also applies to Health Savings Accounts (HSAs). Employers must generally have a “high deductible health plan” (HDHP) to have an HSA for their employees. Several years ago, the Affordable Care Act (ACA) eliminated the ability to use health care FSAs for OTC products, so the CARES Act rolls back that prohibition. The CARES Act also provides that menstrual products qualify as OTC products that can be purchased with health care FSA or HSA funds.

Insight: Employers may want to consult with their vendors to ensure that debit cards or other service delivery mechanisms are updated to accommodate this change in the law, so that employees may begin using health care FSAs or HSAs immediately to purchase COVID-19 related OTC items, such as pain relievers, hand sanitizers, cleaning products, etc.

Insight: Employers may want to remind employees of change in family circumstance requirements that might allow them to change their health care elections including pretax contributions to medical FSAs. Likewise, plan administrators should prepare for an increased number of requests for change.

Health Care Services

The CARES Act requires employer-sponsored group health plans (and health insurers) to address several health care services related to COVID-19, including the following.

COVID-19 Testing. Group health plans and insurers are required to cover approved diagnostic testing for COVID-19, including in vitro diagnostic testing, without any cost-sharing to participants, at their in-network negotiated rate (or if no negotiated in-network rate, an amount that equals the cash price for such tests as publicly listed by the provider).
COVID-19 Prevention. Group health plans and insurers are required to cover any qualifying preventative services related to COVID-19 without cost-sharing to participants. Plans are required to cover these services within 15 days after the date that a recommendation is made regarding the preventative service. Preventative services includes (1) any item, service, or immunization that is intended to prevent or mitigate COVID-19 and is evidence-based with an “A” or “B” rating in the U.S. Preventive Services Task Force’s recommendations or (2) an immunization with a recommendation from the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention.
Expanded Telehealth. Effective March 27, 2020, for plan years beginning on or before December 31, 2021, employers with a HDHP and an accompanying HSA can provide coverage for telehealth services before participants reach their deductible without disqualifying them from being eligible to contribute to their HSA. For calendar year plans, this provision would generally apply for 2020 and 2021. This is consistent with the IRS’s previous announcement that an HDHP will not fail to be an HDHP solely because it provides coverage for COVID-19 related diagnostic testing and services prior to participants satisfying their deductible.

Tax-Free Student Loan Repayments

From March 27 until December 31, 2020, employers can contribute up to $5,250 towards an employee’s student loans and such amount will be excluded from the employee’s taxable income. The employer could either pay the amount to the lender or to the employee. The amount could be applied to principal or interest for “qualified education loans” defined in IRC Section 221(d)(1). The $5,250 limit applies in the aggregate to both the new student loan repayment benefit and other employer-provided, tax-free educational assistance (e.g., tuition, fees, books).

Insight: This appears to be the first time an employer’s payment of an employee’s student loan debt can be made tax-free to employees.

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