COVID‐19: An Employers’ Action List for Employee Benefit Plans · the account balance to 100% of the account balance and loan repayments on existing participant loans may be extended

COVID‐19: An Employers’ Action List for Employee Benefit Plans

Wednesday, June 24, 2020 @ 10am PST

Maria ArriolaCPA, Partner

LSL CPAs

Sherrie BoutwellPartner

Boutwell Fay, LLP

Disclaimer

• This presentation is not legal advice and does not create an attorney client relationship or privilege. The views are those of the author and not of the Firm.

Copyright Boutwell Fay LLP 2020, all rights reserved.

Today’s Agenda

How Families First Coronavirus Response Act “FFCRA” and Coronavirus Aid Relief and Economic Security Act “CARES Act” have impacted employee benefits and what “Actions” you must take for:

• Qualified Retirement Plans

• Non‐Qualified Retirement Plans

Note – we are not covering health and welfare plans but there are also many changes affecting such plans that can be reviewed on our website at www.boutwellfay.com.

What is a “CRD” distribution or loan?

• Special, tax favored distribution from a 401(k), 403(b) or 457(b) plan

• Can be in service or post‐termination

• Participant must have been impacted by COVID‐19

• Employer may choose to offer (or not or limit)

• Limited to 2020 only

• See IRS Notice 2020‐50 for detailed guidance

Qualified Retirement Plans

COVID‐19 Distributions

Who qualifies?

• is a participant or their spouse or dependent is diagnosed with COVID‐19; or• is a participant or their spouse or a member of their household who

experiences adverse financial consequences as a result of (due to COVID‐19):• being quarantined

• being furloughed or laid off

• having work hours reduced due to COVID‐19

• having a job offer rescinded or a start date delayed

• being unable to work due to lack of childcare

• closing or reducing the hours of a business owned or operated by such person

• having a reduction in pay (or self‐employment income)

For purposes of applying these additional factors, a member of the individual’s household is someone who shares the individual’s principal residence.



“CRD” in‐service distributions of up to $100,000 are available from 401(k) plans, 403(b) plans, governmental 457(b) plans for employees who are adversely affected by the Coronavirus – these are preferable to a regular hardship distribution in the following ways under Federal tax laws:

• The distribution may be “repaid” to an eligible plan within 3 years

• The 10% early distribution penalty does not apply

• Income tax on the distribution may be spread over 3 years

• The distribution is not subject to the mandatory 20% withholding



Action Item:

• Plan sponsors will need to make decisions about what will be offered based on new options.

• Get a communication out to employees as soon as possible, even if this was already done (see below).

• Participants may “self‐certify” their own eligibility for the distribution. IRS has clarified there is no duty of inquiry, but employers cannot turn a blind eye if they have “actual knowledge.”

• Plan sponsors who have not already been contacted by the recordkeeper or third‐party administrator, should reach out to them as soon as possible to implement this decision and put in place procedures to properly cap the dollar amount within the plan, especially if they are members of a controlled or affiliated service group.

Note – because of the new guidance in Notice 2020‐50, plan administrators may need to immediately update their communication to participants about the new options to qualify.



At the option of the employer, the limits for new participant loans has increased from $50,000 to $100,000 and the percentage of account balance limit has increased from 50% of the account balance to 100% of the account balance and loan repayments on existing participant loans may be extended for up to a year (but interest still accrues).

Action item:

As with distributions, employers should make a decision about how to handle loans, communicate with plan service providers and participants accordingly, and watch for guidance. IRS has recently clarified the new loan rules including the repayment delay are optional and deemed distributions for unpaid loans are not treated as COVID‐19 distributions (but loan offsets may be treated as a COVID‐19 distribution).


Participant Loans

Many employers will want to limit or reduce costs in 2020:• A plan amendment may be required before participants accrue a benefit:

• Could be at completion of 1000 hours of service• Could be based on payroll periods• Could be based on active employment on last day of plan year• May be required in any event in a defined benefit plan

• For 401(k) safe harbor plans – mid‐year changes may result in loss of safe harbor status so discrimination testing will be required• Unless a “maybe” notice was given in 2019• Unless the employer and all members of its related employer group are

experiencing economic loss• Unless IRS offers relief in the future


Employer/ Matching Contributions

Employers may wish to reduce employer contributions to defined contribution plans. However, reducing contributions to safe harbor 401(k) plans, can be tricky when done mid‐year, as such changes are not generally permitted, and plans that call for fixed contributions or allocations may need to be amended in the next few weeks if a benefit freeze is needed.

Action item:

Plan sponsors should act quickly if they anticipate that there will be a change to an employer or matching contribution in 2020. For example, if there is “1000 hour” requirement for an allocation or benefit accrual, the employer may want to provide notice and adopt an amendment freezing employer contributions, before any plan participant reaches that threshold. Employers will also want to carefully review how hours are counted for that purpose. See: What is a Safe Harbor 401(k) Plan?


Employer/Matching Contributions

Affected participants must be treated as fully vested, in the event of a “partial plan termination.”

This is based on all of the facts and circumstances, but employee‐initiated terminations (including due to COVID‐19) of more than 10% of employees should be reviewed. A temporary furlough may not result in a partial plan termination, but a temporary furlough that later results in a termination could.

Action item: In situations where there are significant layoffs or furloughs, employers will need to watch for possible “partial plan terminations.” See: Partial Termination of Your Qualified Retirement Plan: Don't Let It Sneak Up on You and When Does a COVID‐19 Furlough or Layoff Trigger a Partial Termination for Your Qualified Plan? (Part 1) .


Vesting

Contributions to single employer defined benefit plans may be delayed to January 1, 2021.

Action item: Plan sponsors of defined benefit plans should check with their actuary, to determine the effect on their plan’s funding requirements.


Funding

Although plan amendments to make CARES Act changes do not have to be adopted until later(December 31, 2022 for calendar year plans and even later for governmental plans), otheramendments such as a safe harbor change or benefit accrual freeze may need to be adoptedimmediately.

Action item: Plan for amendments and keep a good record of the operational changes being implemented now so that an appropriate amendment can be drafted later.


Plan Amendments

Action item:

Consult with your plan advisors regarding the following additional operational issues and see EBSA Disaster Relief Notice 2020‐1:

• Notices/Communications: Participants will need to be notified about plan changes. If providing notices electronically, this may be complicated by the fact that some participants may no longer have access to work computers, generally a requirement for electronic disclosures under DOL rules.

• Spousal Consents: For plans that require notarized spousal consents to distributions or alternative beneficiaries, the IRS has issued guidance on how this may be accomplished remotely. See: IRS Notice 2020‐42.

• Black‐Out Periods: Plans that contemplate black‐out periods, in the near future, should consult with their investment and legal advisors whether, any black‐out period should be delayed, or if additional notices or explanations of the risks, during a blackout period, are needed, due to the volatility of the markets.


Plan Administration

Action item:

Consult with your plan advisors regarding the following additional operational issues:

• Paid Leaves/Definition of Compensation: Review plan documents, to determine if a leave or furlough is a severance from employment, and to determine if paid leave is treated as compensation under the plan and implement appropriate processes to implement paid leave.

• Beneficiary Designations: This may be a good time to remind participants, to update their beneficiary designations.

• QDROs: Some are predicting an increase in divorces, due to “stay‐at‐home” orders. Plan administrators should review and update the plan’s QDRO procedures.

• Disaster Declarations: Plan sponsors should review the plan document, to see if the plan already incorporates disaster relief provisions.


Plan Administration

Action item:

Consult with your plan advisors regarding the following additional operational issues and see IRS Notices 2020‐23 and 2020‐50 (and more guidance is expected):

• Elimination of RMDs for 2020: Take steps to stop required minimum distributions in 2020.

• Form 5500 Reporting: The DOL has been granted authority to extend filing deadlines, but to date has not done so ‐ plan administrators should be prepared to file on time or explore use of voluntary late filer programs. See: Correcting Late or Missing Form 5500s. The IRS has extended the Form 5500 deadline for non‐calendar year plans.

• Pre‐Approved Documents/Plan Amendments: IRS has extended the deadline to restate 403(b) plans onto a pre‐approved document from March 31, 2020 to June 30, 2020, and to restate defined benefit plans onto a pre‐approved document from April 30, 2020 to July 31, 2020.


Plan Administration

Required minimum distributions have been eliminated for some plans for 2020:

• Elimination of RMDs for 2020: IRAs and defined contribution plans are excepted but the new rule does not apply to defined benefit pension plans/non‐governmental 457(b) plans/certain other plans are still subject to the RMD rules. This includes participants who delayed a first year 2019 RMD to 2020.

• Correcting an early 2020 RMD: If a participant (or beneficiary) had already taken the 2020 RMD before the CAREs Act passed, they may be able to avoid the RMD in 2020 by rolling over the RMD back to the IRA or plan in 2020 or treating the distribution as a COVID‐19 distribution (assuming they are eligible).

Action Item: Deadlines to fix a 2020 RMD with a rollover are coming up quickly (July 15 – just extended to August 31) so see your CPA or other tax advisor right away.

IRAs and Qualified Plans

Required Minimum Distributions

The CARES Act does not make any specific changes related to non‐qualified deferredcompensation plans, but questions are already being raised.

Action item:

Plan administrators may want to review the provisions of their plans, regarding the following:

• Some employees may be entitled to in‐service distributions, based on experiencing an “unforeseeable emergency.”

• Others may have seen their account balances drop below the small account balance dollar limit.

• For employers experiencing an economic downturn, the ability to make distributions based on a plan termination may be limited.

• Some employees will likely want to limit deferrals; however, mid‐year changes to elective deferrals, in non‐qualified plans, are not generally permitted, unless there is also a distribution due to an unforeseeable emergency.

Non‐Qualified Retirement Plans

Section 409A

For employers that wish to use Payroll Protection Act Loan proceeds to make retirement plancontributions – although this is generally allowed, guidance from the IRS is still needed.Questions concern when the contribution must be made, how to calculate in a discretionaryplan, how to treat unvested amounts.

Action item: discuss with your CPA throughout the year. Action may be needed to accrue the liability during the plan year.

Non‐Qualified Retirement Plans

PPP Loans

Q & A

Thank you!

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