In a continued effort to provide Plan Sponsors and their employees as much information as possible in these trying times, BLBB Plan Services has prepared the following information on how the CARES Act may impact your Retirement Plan and Employees.  This is not legal advice, rather it is an interpretation of the law at this point in time.  We are expecting continued updates to retirement plan provisions in the coming weeks and months and will keep you informed as such changes arise.  In addition to updates on the law, we are also waiting on document providers to add guidance on necessary plan amendments to enable plan participants to utilize provisions found in the CARES Act.

On March 27, 2020, the United States Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).  This is the largest rescue bill to date and provides economic relief to individuals, businesses, state and local governments, and healthcare systems that are financially impacted by COVID-19.  Part of the CARES Act Legislation provides much-needed access to retirement savings for those in financial distress due to COVID-19.

If you wish to read more information on specific provisions within the CARES Act such as loans, withdrawals, Required Minimum Distributions (RMDs), please refer to our document, “The CARES Act & the Impact on Your Retirement Plan for Employees.”

The following document explains how the CARES Act and COVID-19 may affect provisions within your Retirement Plan Document, including:

    • Termination of Employment / Severance
    • Funding of Employee Contributions
    • Funding Employer Contributions
    • Termination of a Plan
    • Required Participant Notices
    • Government Reporting: Form 5500
    • Plan Amendments
    • Approving CARES Act Provisions for your Plan

Information for these topics was provided by BLBB Plan Services’ document provider, ASC, and they may have updates throughout the coming days and weeks.  As is always the case with new legislation, it may take some time to fully interpret and adopt such provisions.

Please be on the lookout for our “Good Faith Election” Form that will be sent to you to adopt provisions for Retirement Plans from the CARES Act.

 

Termination of Employment/Severance

Does Termination of Employment or Severance from Employment allow for a plan distribution?

“… there is no consensus as to the legal status of a layoff, furlough, leave of absence and other events and whether they constitute a termination of employment or severance from employment that allows for a plan distribution. The determination generally relates to whether the employee’s common law employment relationship with the employer has ended. This is clearly a factual (and difficult) determination.” (1)

Simple questions to ask yourself/management:

    • Do I consider the employee an employee still during this time?
    • Is the employee still eligible for benefits during the layoff?
    • Am I holding this employee’s job open for this individual and expecting them to return in a short period of time?
    • Is this a temporary layoff or permanent?

What about loan repayments during this time?

A plan may suspend loans for up to one year for bona fide leaves of absence and for military leave.  The issue right now is that the regulations do not provide a definition for a “leave of absence” and generally this leave is not considered a termination of employment.

This is something we are hoping to have more clarity on in the near future.

 

Funding of Employee Contributions

Do I have the ability to stop employee contributions to the Plan?

No, only an employee can elect to stop/suspend his/her contributions to the Retirement Plan.  This is their choice.

How timely must employee contributions to the Plan be?

If you are a small plan (< 100 participants) participant deferrals must be deposited into the Plan within 7 days from the time that payroll is completed and employees receive their paychecks.

If you are a large plan (> 100 participants), you are required to deposit employee contributions into the Plan “as soon as administratively feasible.”

 

Funding Employer Contributions

Discretionary Contributions

Most Plan profit sharing features are set up to be “Discretionary” … where management can decide year-to-year whether they are making a contribution and at what amount.

If you feel that this year is not the best time to make such a contribution, you can hold off on doing so or reduce the amount.  While you are not required to notify participants, if you have historically made such contributions, it may be prudent to notify participants of such changes.

If you would still like to make a contribution for the year but would like to reduce the amount, let your BLBB Plan Services know and we can complete a new calculation.

 

Funding Employer Contributions

Safe Harbor Plans – Suspensions, Delays, Termination

In general, Safe Harbor contributions can be suspended with a 30-day notice to participants if one of the following conditions are met:

  • Employer is operating at an economic loss; or
  • Safe Harbor notice provided prior to January 1, 2020 had language indicating that contributions could be suspended mid-year provided a 30-day notice was communicated to participants.

The most important aspect of suspending the Plan is that it remains OPEN and participants are still able to contribute to the Plan.

 

How do we suspend our Safe Harbor Contribution?

The Plan must first be amended to reflect the suspension and then a notice must be sent to all plan participants at least 30 days prior to the effective date of suspension.

Notice allows participants to make changes to their deferral rates prior to the effective date of the suspension.

What happens if we suspend our Safe Harbor contribution?

Following an amendment and notice to plan participants, the Plan will then be subject to mandatory ADP / ACP testing for the entire year.  For instance, if you decide to suspend the contribution in 2020, you are no longer considered a Safe Harbor Plan for the year 2020 and requires BLBB Plan Services to run mandatory testing.  This means that certain Highly Compensated Employees may not be able to defer up to the maximum limit and the Plan may not pass top heavy testing.

Can we reinstate our Safe Harbor contribution?

Yes, following an amendment and notice to plan participants, an employer may reinstitute their Safe Harbor provisions or the following calendar year.

Match Safe Harbor – must be amended in the Plan before the start of 2021 plan year

Non-elective Safe Harbor – can be amended after the start of 2021 plan year (SECURE Act)

Can we delay the Safe Harbor contribution?

Yes, you can delay your Safe Harbor contribution and this action does NOT require a Plan amendment.

If you have a non-elective Safe Harbor Plan, you are not required to make the contribution until the employer’s taxes are due.

If you have a matching Safe Harbor Plan and your document has a match on an annual basis, you are also able to wait until the employer’s taxes are due.

If you have a matching Safe Harbor Plan and your document has you matching per pay, according to current regulations, you are able to delay funding for one quarter.  This means you would not need to make up the matching contribution until June 30, 2020.  This would be a short-term fix.

If you have a matching Safe Harbor Plan and your document has you matching per pay and you are struggling with the ability to fund the Plan at this time or even after one quarter, you could decide to roll the dice and “wait and see” what further guidance and leniency plans are available in the near future.

 

Termination of a Plan

We are still waiting on additional guidance when it comes to employers’ inability to continue to offer a Retirement Plan.  The hope is that there will be more information on how employers can suspend contributions instead of having to completely terminate a Plan.

Can we terminate our Plan altogether?

Yes, plans can be terminated through corporate action.  This would require a Board Resolution; this can be prepared by BLBB Plan Services.

What happens if we terminate the Plan?

All plan participants with a balance, regardless of employment status, are 100% vested.  This means that anyone that is a terminated employee that has an account in the Plan, still with a percentage not vested, would become 100% vested.

A new 401(k) Plan cannot be established for at least 12 months following the final distribution from the Plan.

Any required contributions through the date of plan termination must be funded.

Plan will be exempt from ADP / ACP testing as well as top-heavy minimum contributions if:

  • Termination based on merger or acquisition; or
  • Plan sponsor is operating at an economic loss

Required Participant Notices

We wish to suspend our Safe Harbor contribution mid-year.

As mentioned above, you are required to give participants at least 30 days’ notice if you intend to suspend Safe Harbor contributions.  Proper notice allows participants to make changes to their deferral rates in the case that they are no longer receiving a contribution from the employer.

Our plan is a non-elective Safe Harbor Plan and we wish to delay funding it until later this year.

The employer is not required to notify participants of a delay in funding in a non-elective Safe Harbor Plan as an employer has the right to make contributions at any point in time during the year, before their taxes are due.

We would recommend that if you were more frequent with your contributions in the past, that you give notice to participants of your intention to make a one-time contribution later in the year so that they are aware of the changes, but you are not required to do so.

Our plan is a matching Safe Harbor Plan and we wish to delay funding it until later this year, what do we need to send to participants?

You are not required to notify participants, but again, it would be prudent to let them know the changes that are occurring.

Government Reporting: Form 5500

Will our Plan’s Form 5500 deadline be extended?

At this time, no extension has been announced.  We are hoping to have updates and will let you know as those become available.

Plan Amendments

Do we need to amend our Retirement Plan to include the CARES Act provisions?

Yes; however, you are not required to do so until the end of 2022.  For the time being, plans can adopt the provisions through a “Good Faith Election” Form supplied by BLBB Plan Services (see more information below).

Are there any situations in which we would need to make immediate Plan Amendments?

Yes, if you wish to suspend or terminate Safe Harbor contributions or non-discretionary matches.

Approving the CARES Act Provisions for your Plan

How do we add the CARES Act provisions to our Plan today?

You will receive a “Good Faith Election” Form from BLBB Plan Services that you will be required to complete in order for your Plan to adopt the CARES Act (or any part of).  This will need to be signed and returned to BLBB Plan Services.  We have provided an option on the election form for plan sponsors to elect NOT to include such provisions in their Plan as well.

 

Failure to complete and return this document means that you have not approved the CARES Act provisions and in turn, BLBB Plan Services will continue to administer the Plan as the law and your document suggests, not including the CARES Act changes.

 

Example:    Participant loans will remain the lesser of: (1) 50% of account balance, or (2) $50,000.

 

If you have any questions about the items listed here or would like to discuss your specific circumstances, please do not hesitate to contact your BLBB Financial Advisor Edward Barnes or Brianna March at (215) 643-9100 or edbarnes@blbb.com and bbarnes@blbb.com. In addition, your Plan Administrator is a great source of information and can answer Plan specific questions should they arise.  You can reach them by calling (215) 643-9100 or by emailing them directly.

 

BLBB does not provide tax advice nor practice law.  Please see your licensed tax or legal professional who is familiar with your particular facts and circumstances.

 

 

Sources:

ASC COVID-19 FAQs: https://www.asc-net.com/covid-19-faq/?_ga=2.127855758.2064246521.1585752045-185328662.1579729384

LT Trust – Coronavirus Aid, Relief and Economic Security Act the CARES Act Webinar (April 1, 2020): https://register.gotowebinar.com/recording/8819714236462142978

 

 

[Download The CARES Act & the Impact on your Retirement Plan for Plan Sponsors]