Original article written by legacy firm, Harris Group Advisors (2021)
The CARES Act was a swift federal response to help businesses and employees manage pandemic-related economic challenges. Many aspects of the wide-range law make significant changes affecting employer-sponsored retirement plans and their participants.
Since March 2020, plan sponsors have raised many questions about how the CARES Act affects plans and participants. Below is a list of some of the most common questions plan sponsors face, along with our brief answers.
Did COVID-19 furloughs create partial plan terminations?
COVID-19-related furloughs may have triggered a partial plan termination. A partial plan termination generally occurs when 20%+ of participants leave without full vesting in a year. Partial terminations may result from major events like plant closings or high turnover due to economic hardship or uncontrollable factors. A furlough places an individual on involuntary, unpaid temporary leave, but the employer still considers them an employee. A furloughed employee generally isn’t counted in a partial plan termination if they return within the plan year. To determine a partial plan termination, plan sponsors must calculate turnover and assess the surrounding circumstances. There is no one perfect formula that fits all situations.
Plan sponsors have until March 31, 2021 to restore workforce levels and avoid a partial plan termination.
If yes, do plan sponsors have to vest everyone or just the furloughed workers?
When a partial plan termination occurs, affected employees automatically receive full vesting in all employer contributions. Please visit our plan termination article for more information.
When do plan sponsors apply the partial termination rules?
The plan’s circumstances determine the period, typically within one plan year, but related severance events may extend it. See the Internal Revenue Service’s (IRS) issue snapshot on partial plan terminations.
Does the plan count FFCRA sick and family leave payments as compensation?
Most likely yes—FFCRA leave is in Box 1 of Form W-2, which many plans use to define compensation. But plan sponsors will need to look at how their plan defines “compensation.” Plans that exclude paid time off would likewise exclude FFCRA paid time off, though such exclusions appear to be rare.
Why are auditors asking plan sponsors to document their Going Concern positions in a memo?
Many plan sponsors are unsure of their ability to fund Employer contributions to their plans and have made changes to plans as a result of the pandemic. FASB ASU 2014-15 outlines that management is responsible for performing the annual going-concern assessment. It is critical for management to prepare this analysis for their financial statements, including a memo on their considerations. The memo helps auditors evaluate whether there is substantial doubt about the plan’s ability to continue as a going concern. This formerly was the auditor’s responsibility, but in the past five years, this has shifted and is now a standard duty of the plan sponsor.
Which provisions from the CARES Act do most organizations adopt?
According to research from Plan Sponsor Council of America, 46% of surveyed plans have elected to allow repayment of coronavirus-related distributions during the next three years, followed closely by 45% allowing some distributions until December 31, 2020. Only 9% of those surveyed adopted or plan to adopt no provisions.
What is the difference between “temporary impairment” and “other than temporary impairment”?
These are accounting principles used to describe the nature of the decrease in an asset’s value, which is a standard topic that needs explanation in the plan’s audit. “Temporary impairment” refers to normal market fluctuations in a specific investment; “other than temporary impairment” refers to a permanent decline in the investment with little to no chance of recovery. Given the extraordinary nature of the COVID-19 pandemic and its varying economic impact across industries and businesses, it is important to work with auditors to determine the correct classification of losses.
How can plan sponsors change the timing and frequency of the employer matching contribution from each pay cycle to a year-end contribution?
There are IRS and plan document limitations related to changes in certain types of Employer contributions, such as Safe Harbor contributions. However, generally a sponsor can more easily change the timing of the deposit of those contributions into the plan, rather than change the formula and eligibility provisions of the Employer contribution. When cashflow is tight, consider funding the contribution on an annual, quarterly, monthly, or per payroll period basis to fit your needs. Employers generally have until the extended due date of their federal income tax return for that tax year to deposit Employer contributions into the retirement plan. Plan sponsors should review their plan documents (and summary plan description) to determine whether they need to amend the timing of Employer contributions to the plan.
Do plan sponsors have to implement the CARES Act provisions for the new distribution and loan options?
The CARES Act expanded current rules on coronavirus-related distributions and loans, increasing the amount affected participants can pull from their accounts as well as the time they can take to repay the money, if applicable to the transaction. It’s important for plan sponsors to understand that the distribution and loan provisions are optional, as outlined in IRS Notice 2020-50. Plan sponsors should be aware that they may choose among the provisions and adopt the ones that they feel their participants would benefit from the most.
If plan sponsors implement a change to their plan allowed by the CARES Act, when should the plan document be amended to reflect the change?
The CARES Act allows plan sponsors to immediately offer its options before formally amending the plan document. They must adopt the amendments by December 31, 2022 (for calendar year plans) or by the end of the 2022 plan year (for non-calendar year plans).
Can plan sponsors stop making employer contributions?
In general, plans can reduce or eliminate discretionary non-elective and discretionary matching contributions without needing to amend plan documents, but plan sponsors need to examine plan documents to make this decision. Note that plans operating as Safe Harbor plans face a different set of requirements. See the section, “Can plans reduce or eliminate matching contributions?” in this BDO article to learn more about these requirements and other options plan sponsors have for conserving cash during the pandemic.
Can participants still take a Required Minimum Distribution (RMD) even though the IRS waived RMDs for 2020?
Yes, but only if the plan allows withdrawals. The CARES Act allows participants to waive the RMD for 2020, but the law does not prohibit participants from taking a withdrawal. First, review the plan document to confirm it allows withdrawals; then, check whether the plan adopted the CARES Act’s relaxed withdrawal rules to determine the maximum amounts.
Original article written by legacy firm, Harris Group Advisors (2021)
