Issues for Employers to Consider Regarding Their Sponsored Retirement Plans During the COVID-19 Pandemic
During these times of economic uncertainty, there are several measures that an employer may wish to entertain in order to limit its potential financial exposure with respect to the retirement plans it sponsors. In addition, employers and their HR departments are likely to receive inquiries from concerned employees relating to these retirement plans. This client alert addresses some of these issues.
Can an employee take a hardship withdrawal?
The answer may differ based upon the standard that the 401(k) plan uses in determining whether an employee is eligible for such a withdrawal from his/her account. If the plan includes the usual “safe harbors” from the ERISA regulations, it may be that a period of prolonged unpaid leave will not be considered to constitute a covered hardship. (Then again, payment for medical expenses incurred in connection with treating COVID-19 will qualify under the “safe harbor” standard for medical expenses). If, the plan uses a facts and circumstances standard in lieu of the “safe harbors,” then unpaid leave may qualify. In the SECURE Act, the IRS recently added federally-declared disasters to the list of “safe harbors.” If President Trump makes such a declaration about the COVID-19 pandemic, it would seem that hardship distributions could be made on that basis. The amount available for hardship withdrawals for those qualified individuals affected by the COVID-19 pandemic has been increased to $100,000 per the CARES Act during 2020;there will be no 20% mandatory withholding tax on such distributions or 50% of account balance limitation and taxes can be spread over a 3-year period or avoided by depositing the equivalent amount into another plan or IRA over the 3-year period.
Can participants stop making 401(k) loan payments?
Yes, a plan can permit participants to suspend loan payments temporarily during unpaid leaves of absence. However, when the participant returns to work, the missed payments will need to be re-amortized over the remaining original term of the loan. Pursuant to the CARES Act, for those affected by the COVID-19 pandemic, with respect to loans to qualified individuals made between March 27, 2020, and September 23, 2020, the maximum loan amount has been increased to $100,000 and any payments due during the period from enactment of the CARES Act until December 31, 2020, are delayed for 1 year at which point interest accrued during the period of forbearance is re-amortized over the loan term as extended by 1 year.
Can the employer afford to continue its plan contributions?
In light of the present situation, an employer may wish to suspend it matching contributions, especially where they are made on a payroll period basis. In addition, employers may wish to reduce the amount of contemplated discretionary nonelective profit sharing contributions for 2020.In the event that the 401(k) plan features required contributions such as a matching or nonelective safe harbor formula, the employer may want to consider suspension of that arrangement. Furthermore, if the employer sponsors a retirement plan with minimum funding requirements (for example, a defined benefit/cash balance/target benefit/money purchase pension-type plan), now is the time to consider whether the employer can reasonably afford these contributions as benefits under such plans typically accrue with the completion of 1,000 hours of service.
Can the plan waive a limit on the number of 401(k) loans?
Yes, the plan can waive the limit on the number of participant loans. The plan could implement such a waiver on a temporary basis.
The Tax Department and Employee Benefit Groups at Dilworth Paxson are ready to assist you in connection with any of these issues whether by drafting a plan amendment or establishing an administrative policy, whichever may be appropriate under the circumstances.