CARES Act FAQ: Distributions, Employer Contributions, & Loans
If you attended our CARES Act webinar or have been following global developments and monitoring the COVID-19 pandemic’s impact on your 401(k), you may find the FAQ below helpful.
Please note that these answers are given as suggestions based on the information available as of April 15th, 2020.
+ Employer Contributions
Can 2019 contributions to IRAs and Plans be extended to July 15, 2020?
Yes. Contributions to plans and IRAs that would have been due on April 15, 2020 are extended to July 15, 2020.
If employees are furloughed, do they have the option to catch-up missed contributions when they return from furlough?
Yes, employees can modify their deferral elections as often as allowed by their plan sponsor and the plan sponsor should have the frequency of how often one can modify documented in their employee handbook. If it is not documented in the employee handbook, then provisions should be included in the plan document.
What requirements do employers have to meet during the furlough period for employees that participate in 401k contributions?
The rules of the retirement plan do not change. If an employee is being paid wages and has elected to have 401k deferrals withheld, then deferrals should continue to be withheld until the employee directs otherwise. If compensation is not being paid to the employees, then there are no 401k deferrals or loan repayments to withhold. The 401k deferrals and loan repayments should automatically restart when the employees are again receiving wages. All employees that were eligible to participate prior to the furlough period will be immediately eligible to participate when they are brought back to work.
If we already funded the 2019 contributions to the plan, can they be sent back to the company?
No. Once contributions are deposited to the plan’s trust account, they cannot be reverted back to the plan sponsor unless the “mistake of fact” rules apply which have a very narrow window of interpretation as provided through guidance.
What are “safe harbor” contributions?
The term “safe harbor” is used in reference to many different provisions within the world of qualified plans. The “safe harbor” contributions we are referring to are only specific to 401k plans, and in some cases, 403b plans, to avoid non-discrimination testing requirements. These contributions, in most cases, allow all participants (including the owners or other Highly Compensated Employees (“HCEs”) to contribute the maximum amount of 401k contributions ($19,500 for 2020) to the plan for the year.
Do you still recommend Safe Harbor plans for small businesses starting 401(k) plans in 2020?
If the plan sponsor can afford to make the contributions, then yes the safe harbor design is still a great design for small companies. If the company is unsure about their ability to make the required safe harbor contributions but they want to provide an opportunity for their employees to make 401k contributions, then small business owners (or other Highly Compensated Employees) will need to accept that they may receive some or all of their contributions as a taxable refund or they should consider not contributing until the safe harbor contributions can be implemented.
For the 2019 SH mandatory contributions, has the due date been extended to 7/15/20?
The due date depends on 1) the corporate structure/entity and 2) the fiscal year of the plan sponsor. The due date will be the due date of the tax filing associated for the plan sponsor. The most common due dates are 3/15 and 4/15 but would differ is the corporate fiscal year is not the calendar year. Your CPA should be able to confirm the due date of your taxes.
Where in our plan documents do we see if we have the allowance to stop safe harbor contributions mid year?
The language would not be in your plan document but would be included in your safe harbor notice that would have been distributed in Q4 of 2019.
+ Distributions
Who is qualified to take distributions and loans under the CARES Act?
A qualified individual is someone who:
- has been diagnosed with COVID-19 by a CDC recognized test
- has a spouse or dependents who have been diagnosed with COVID-19 by a CDC recognized test
- has experienced adverse financial consequences due to: being quarantined; being furloughed or laid off; having my work hours reduced; being unable to work due to lack of childcare as a result of COVID-19; the closing or reduction of hours of a business owned or operated by the individuals due to COVID-19
Can the employer decide if they will allow or not allow the plan to adopt the distributions and loan provisions under the CARES Act?
It depends. The plan sponsor has the ability to determine whether the increased limits should apply for loans and distributions. Even if the plan does not elect to allow the increased limits, participants may still be able to take advantage of the withdrawal penalty relief as long as they meet another distribution event from the plan. The plan sponsor will be billed for the amendment when the amendment is prepared in 2021 or 2022.
When is the last day to take a distribution under the new rules?
The CARES Act allows distributions to be made through December 30, 2020 and new loans under this rule must be taken no later than September 23, 2020.
Do I have to take an RMD from my retirement plan?
No, Required Minimum Distributions (RMDs) due in 2020 are not required from defined contribution qualified plans, 403(b) plans, IRAs, and governmental 457(b) plans. If the RMD is due to death, the five-year maximum distribution period is determined disregarding 2020.
Can I put my RMD back into my plan if it was already paid in 2020 and how does that affect any tax withholding that was done?
If you have already received your RMD for 2020, the funds cannot go back into the plan. Any taxes withheld will be treated as withholding tax. The RMD waiver is only for RMDs that have not been paid. However, since the RMD is not longer required, the distribution is eligible for rollover. If you have taken your distribution in the last 60 days, you can rollover your RMD to a qualifed plan or IRA.
Is there a deadline to elect these provisions? When will participants be able to take advantage of these provisions (distributions/loans/loan deferral payments/etc)?
Participants are able to take advantage of the distributions for 2020. Most of the loan provisions are only available for the next 6 months, based on current guidance. Operationally, the distribution and loan provisions can be implemented as soon as plan sponsors choose to enact them. The amendment will likely not be available until 2021 and does not need to be signed until 2022.
+ Loans
Can participants take a second loan?
Yes. If the Plan Sponsor elects the plan to allow loans under the CARES Act, the new loans will be in addition to any current outstanding loan balances. This may require an amendment prior to the end of 2020 based on the number of current loans allowed. We expect to follow up with plans in August or September if any documents need to be updated before year end.
Can I delay current outstanding loan repayments?
Yes, for qualified individuals, the CARES Act provides that any loan repayment due during the period from March 27, 2020 to December 31, 2020 can be delayed for one year, and the five-year repayment period will disregard the 2020 delayed period. Interest will accrue during this time.
Where can we find information regarding small business loans provided under the CARES Act?
Information regarding small business loans can be found on the SBA site here and additional information can be found here. Any questions regarding payroll loans should be directed to your payroll administrator, CPA or tax advisor.
Are contributions to a retirement plan included in both the payroll calculation for small business loans under the CARES Act?
The Department of Treasury clarified that payroll costs related to retirement plan contributions, related to either defined contribution or defined benefit plans, are included in the definition of payroll costs when determining PPP loans. Please see the resources available here and direct any questions regarding payroll loans to your payroll administrator, CPA, or tax advisor.
How does an employee apply for extension on current loan payments?
The participant must certify to the plan sponsor that they are a qualified individual. Once that is established, the plan sponsor can work with their payroll provider to stop the loan repayments. As long as the employee is not terminated, the loan repayments are suspended and the loan will not be in default for 1 year. In 2021, when the payments must restart, please notify LT Trust to re-amortize the loan and begin the loan repayments.
+ Other
What impact is there to Defined Benefit plan funding requirements?
Minimum funding rules were relaxed by extending the due date for all contributions originally due in 2020 to January 1, 2021. You should discuss any specific questions with your defined benefit plan administrator.
For the suspension of the safe harbor, does that have to be done now, or can it be done at a later date if cash flow begins to slow down?
Plans can delay funding until the tax return deadline without any formal amendment. If a plan sponsor wants to formally suspend safe harbor contributions (meaning, stop the liability from accruing for compensation paid during 2020), then they would need to do so now. However, there is no current guidance that would allow a plan to revert back to a safe harbor status for 2020 once they formally stop safe harbor contributions for the year.
We are a dental office and have been required to close down because of the coronavirus pandemic. We will not be contributing to our plan for the time we are closed until further notice. What should we do in this scenario if we can not contribute?
Without knowing the specific plan information, we don’t know what types of contributions are involved. If employees are NOT receiving compensation, then contributions would not apply during this time. If employees are receiving compensation, then the contributions would need to apply. There are funding options to consider based on the flexibility and timing of such contributions.
It was stated that we need to inform you if we want to allow these new options, how do we do that?
We are in the process of creating a survey to gather responses and expect to send the survey out prior to April 17th.
+ Employment Changes
What was the 20% rule for employees laid off?
A partial plan termination requires that any employees that have their employment terminated as a result of an “employer initiated event” have their vesting updated to 100%. A partial plan termination is deemed to have occurred when 20% or more of the workforce is “laid off” during a 12 month period. We are awaiting guidance to see how this should be applied when employees are rehired (or expected to be rehired). If all employees are expected to be rehired within 6 months or end of the year, then it seems reasonable to take the approach that a partial plan termination did not occur.
What are an employee’s options if the employee is terminated or furloughed and has an outstanding loan?
According to the loan policy, loans are due upon termination of employment. If an employee is not terminated but is furloughed or laid off and expected to return to work, the loan is not due and will not default in 2020. For terminated participants, you may wish to amend your loan policy to allow terminated participants to make loan repayments.
How do you handle repayment of existing loans if the employee is laid off?
Loan repayments can be suspended for 2020. The loan will accrue interest during this time, however the loan will not be considered to be in default. Loan repayments can resume in 2021. The loan period can be extended for 1 year.
If an employee is laid off, then their position is eliminated, what happens to the outstanding loan?
While the employee is laid off, the loan can be suspended so that no loan repayments are due in 2020. However, once the employee is terminated, the loan will be due. The loan will be considered a distribution when the employee is terminated.