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How Retirement Plans Are Being Impacted by COVID-19 and the CARES Act

As businesses navigate through the challenges of dealing with the impacts of the COVID-19 pandemic, it is important that benefit plan management consider any implications to their retirement plans.

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As businesses navigate through the challenges of dealing with the impacts of the COVID-19 pandemic, it is important that benefit plan management consider any implications to their retirement plans.

As businesses navigate through the challenges of dealing with the impacts of the COVID-19 pandemic, it is important that benefit plan management consider any implications to their retirement plans. In these uncertain times, plan sponsors may be considering suspending employer contributions or even implementing workforce reductions.

Depending on how the plan document is drafted, any changes to employer contributions may require an amendment and there may be restrictions on reducing the employer contributions. In most cases, the suspension of employer contributions will require notification to the plan participants.

Employers facing a possible reduction in workforce should consider the potential of triggering a partial plan termination. In general, if 20% of a plan’s participants are terminated, the affected participants become immediately 100% vested in their employer account balances.

Plan sponsors should reach out to their third-party administrators and advisors to determine the best course of action before making any significant changes to their retirement plans.

Special Rules for Use of Retirement Funds Under the CARES Act

On March 27, 2020, Congress approved the Coronavirus Aid, Relief and Economic Security (CARES) Act and the President subsequently signed the bill into law. While most headlines will be focused on the tax credit and recovery rebate available to most taxpayers, the CARES Act also has retirement plan implications that could aid participants by allowing them access to their plan funds.  Such provisions include:

  • Individuals impacted by the virus can withdraw up to $100,000 from their accounts with no 10% penalty. These participants have the option to recontribute the funds within three years without impacting IRS contribution limits or have the option to pay applicable taxes on the distribution ratably over a three-year period.Individuals qualify for a “coronavirus-related distribution” if they, a spouse, or a dependent are diagnosed with SRS-COV-2 or COVID-19 through a CDC approved test.  In addition, individuals may qualify if they experience adverse financial consequences as a result of being quarantined, furloughed or laid off, have had work hours reduced or are unable to work due to lack of child care.
  • Increased plan loan limits from $50,000 to $100,000 and increased the eligible amount borrowed from 50% to 100% of the qualified individual’s vested account balance. Additionally, if current loans are due by the end of the year, the Act permits a one-year extension with re-amortization of the payments. In order to qualify for the enhanced loan limits, individuals must meet the same criteria for coronavirus-related distributions above.
  • A one-year delay in required minimum distributions (RMDs) for defined contribution plans, IRAs and 457 plans. It does not appear to apply to defined benefit plans. The delay applies to both 2019 RMDs that needed to be taken by April 1, 2020 as well as 2020 RMDs.

Plan amendments resulting from the CARES Act are required to be executed by the end of the plan year beginning January 1, 2022.

Funding Relief for Defined Benefit Plan Sponsors

Under the CARES Act, businesses who sponsor single-employer defined benefit (DB) plans have the option to delay any 2020 payments of minimum annual required contributions to January 1, 2021.  Any contributions that are delayed are increased by interest for the period beginning on the original due date to the actual payment date.

In addition, the CARES Act provides temporary relief for required benefit restrictions.  Normally, if a plan’s adjusted funding target attainment percentage (AFTAP) is less than 80%, there are restrictions on distributions that may be made to participants and on the ability to enhance benefit accruals.   Under the Act, the plan sponsor has the ability to use the plan’s AFTAP for the previous plan year (the year ending prior to January 1, 2020) as the AFTAP for plan years which include calendar year 2020. This may allow some plans to avoid triggering certain benefit restrictions in 2020.

Please contact Janet Nahorney at jnahorney@blumshapiro.com or Steve Villecco at svillecco@blumshapiro.com with additional questions.

Disclaimer: The contents of this resource are for general informational purposes only. While every effort has been made to ensure its accuracy, the information is provided “as is” and no representations are made that the content is error-free. We have no obligation to update any content, comments or other information for retroactive or prospective interpretations or guidance provided by regulators, financial institutions or others. The information is not intended to constitute legal advice or replace the advice of a qualified professional. There are areas of the CARES Act where additional clarification from the Treasury Department and the SBA is needed. Your judgment and interpretation of the act may be needed. Users should consult with their legal counsel and representatives of the lending institution regarding the proper completion of their application and supporting documentation.

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