Info about the CARES Act and how its new features can help provide relief to your employees
COVID-19 has had a substantial impact on all of us, and we are incredibly sensitive to everything you are going through at this time. As such, please know that we are working diligently to create a smooth and swift process for any COVID-19-related requests and will continue to provide updates as they become available. In the meantime, please refer back here as often as needed for answers to frequently asked questions.
What options were introduced in the CARES Act that affect my retirement plan?
Plan sponsors elect to add three new features to their plans to give participants three ways to more easily access their retirement accounts:
- A special coronavirus-related distribution that permits qualified participants to take a distribution of up to $100,000 without paying the early withdrawal penalty
- A special coronavirus-related loan feature that allows for a higher amount to be available to qualified participants. Participants will also have the ability to defer payment on new and existing loans for up to a year.
- The ability for older participants to forego having to take a required minimum distribution in 2020 so they are not forced to withdraw funds in a down market.
The first two are optional. The third appears to be a required feature. We say “appears to” because the CARES Act requires further regulatory guidance in some areas, and if any future guidance affects our position, we will let you know.
How do I go about allowing my participants to take COVID-related loans and distributions?
All plan sponsors have the ability to ‘opt-in’ to allow COVID-related loans and/or distributions for their participants. To do so, go to the My Plan section of your portal and click the Plan Settings link in the upper right-hand corner. As a plan sponsor, you only need to tell us which of these new features you want to add to your plan. Your plan will need to be formally amended accordingly, but at this point, you can add the features immediately by making this election via our portal. The CARES Act allows plenty of time for the formal execution of the amendment as it is not due until December 31, 2022. Based on what we are hearing from our industry partners, we expect to have the IRS-approved language for the amendment in 2021.
Is there a charge for the amendment?
There will be no charge for this amendment. We see this as an important way for you to help participants through this trying time.
If I would like to make a COVID-related amendment to my plan, do I get to choose which options I want to add?
Yes. By logging into your portal and visiting the My Plan -> Plan Settings page, you can select which of the newly available options you want to add to your plan. Adding loans and distributions are both optional. However, allowing older participants to forgo RMDs appears to be required. We say “appears to” because the CARES Act requires further regulatory guidance.
If I want to add COVID-related loans to my plan, how do I know if any of my participants applied and the specifics of their repayment?
As part of the loan process, your participants will be able to designate when they would like loan repayments to begin. We will be using this information to communicate to you via email when these payments need to start with the repayment schedule.
As with many other deductions, you will need to set up the loan repayment amount and schedule it within your payroll system.
My plan does not currently allow for loans. Does that mean I can not add the CARES Act Coronavirus Loan option?
Any plan can be amended to allow for the Coronavirus Loans. For example, if your plan does not currently permit loans, but you want to allow your participants to take advantage of the Coronavirus Loans, you need to amend your plan to add a loan feature. In other words, all participants would then be allowed to apply for loans under the regular loan rules. However, since participant loans are not considered a “protected benefit,” it is possible to amend the plan document to allow for loans temporarily and then remove the provision effective after the Coronavirus Loans period expires (the CARES Act currently permits the higher loan amount to be available for loan applications submitted through September 23, 2020, but that date may be extended).
If your plan already permits loans, your plan document and loan policy statement may need to be amended to allow the higher loan amount. It is common for plans to limit a participant to only one loan outstanding at a time and/or to prohibit a participant from refinancing an existing loan to take out additional funds. The CARES Act does not change those types of provisions. For example, if your plan limits a participant to only one loan outstanding at a time, that still applies even though the maximum dollar amount has doubled. That means a participant with an existing loan would not be able to take advantage of the new limits unless/until they pay off that loan or you amend the plan to remove the “one loan at a time” limitation.
Can a participant who already has an outstanding loan delay repayment?
Yes, the CARES Act allows participants to postpone any loan payments (on new or existing loans) that would otherwise be due between March 27, 2020, and December 31, 2020, for up to one year. Interest continues to accrue on those payments, but the length of the postponement can extend the five-year maximum repayment term for non-residential loans. Participants can request to defer payments on an existing loan by emailing us at help@vestwell.com.
What is the possible impact on my plan if my employees are furloughed or terminated?
If your business terminates a significant number of employees who participate in your plan, it could result in a full or partial plan termination. It all depends on the facts and circumstances, such as the extent of the termination, whether your business is seasonal in nature, or if you have had similar layoffs in the past. We can’t give a definitive rule, but the IRS generally views a layoff of 20% or more of participants to trigger a partial plan termination. Read more here.
A furlough, by contrast, does not usually result in a full or partial plan termination. Furloughed employees remain participants in the plan, but they cannot make deferrals during the furlough period because they are not being paid at that time.
If a number of my employees were terminated or furloughed, can they still take advantage of these CARES Act relief options?
It depends on the language in your plan documents. If you want to allow furloughed or terminated participants to be able to take advantage of the CARES Act relief options, you should opt-in on the platform to allow for these amendments.
What if my participant wants to start repayments sooner?
If a participant decides that they would like to start repayments sooner than what they indicated on the form they submitted, they should contact us at help@vestwell.com for assistance. As per our standard process, we will inform you, as the plan sponsor, when to start deductions by setting up the repayment schedule in your payroll system.
Although the loan limits have doubled, the maximum repayment period is still limited to no more than five years unless the loan is used to purchase a principal residence, in which case the maximum loan repayment period is fifteen years. The CARES Act does provide some relief that allows certain participants to postpone loan repayment on new or existing loans for up to a year as long as they apply for the loan by September 23, 2020 (that date may be extended). Participants whose payments are postponed under that provision can extend their repayment period by the length of the postponement.
I have a current integration with my payroll provider and Vestwell. Do I need to do anything differently as it relates to COVID-related amendments?
Yes, you still need to opt in if you want to permit any or all of the CARES Act relief options.
What do I need to consider by adding the COVID-related distribution to my plan?
Participants who apply to take a coronavirus-related distribution will need to qualify and confirm to us that they satisfy one or more of the required conditions. They will not be assessed an early withdrawal penalty, and they can elect not to have taxes withheld. They can also repay the distribution back into the plan at a later time.
As of now, the IRS and Department of Labor do not require recordkeepers or plan sponsors to track whether and when a participant repays any of their coronavirus distribution back to the plan. We are awaiting further guidance on how we should process any repayments for a Coronavirus Distribution. The CARES Act also says that any such repayments will not count towards the participant’s annual contribution limits. If anything changes and the regulators place any burden on sponsors, we will let you know.
Does my plan currently need to allow for in-service distributions to take part in the COVID-19 distribution option?
No. The plan can add this coronavirus-related distribution even if the plan does not permit in-service withdrawals.
What do I need to consider by adding the Required Minimum Distribution (RMD) option?
The RMD waiver in the CARES Act permits participants who turned age 70 ½ in 2019 and would therefore be required to take a distribution in 2020 to remain in the plan. If the participant already received the RMD earlier in 2020, they can roll it back into the plan within 60 days of receiving the distribution. If your plan does not already permit incoming indirect rollovers, we can amend your plan to allow that, and we will send you an amendment for your signature. There is plenty of time before that deadline approaches, as we have until December 31, 2022.
If I decide to make any CARES Act relief options available to my participants, what else do I need to do?
The CARES Act does not include any specific participant communication requirements related to the increased loan limits. However, in order to make the change effectively available, participants need to know about it. So, even though you are not legally required to provide formal communication of these changes, we strongly suggest that you notify participants of the new loan limits as well as any other changes you might be making to your plan to accommodate expanded loan access. We will circulate these communications as well.
How should I treat annual Safe Harbor employer contributions (either match or non-elective) to maximize our chances for PPP loan forgiveness?
Since PPP loans must be spent by June 30, 2020, sponsors may wish to use some of that money for participant 401(k) contributions or matching to maximize their chances of obtaining loan forgiveness. However, since these deposits are often contributed on an annual basis, this would require sponsors to switch to a per-payroll basis (called “pre-funding”).
This can be done, pending some considerations:
- The deposits must be applied evenly across all participants without regard to whether or not participants have taken out a loan or otherwise.
- Most companies that pre-fund contributions may be required to make a “true-up” contribution at the end of the year. A true-up is often needed when the amount a participant receives in matches throughout the year is less than the amount the employer owes the participant annually. This typically occurs due to fluctuations in how much the participant contributes each paycheck. Therefore, it is common with pre-funding that a sponsor owes additional money at year-end to “true-up” their funding.
- Depending on the plan documents, it may be possible for a sponsor to opt out of making a true-up. If the sponsor wants to explore that option, they should indicate that in our year-end questionnaire so we can research whether your plan permits it. Otherwise, sponsors will be required to make the additional contribution.