In the current economic environment, evaluation of the provisions available in employee benefit plans to provide relief to both participants and employers is an area for consideration for all businesses.
In order to expand relief available in existing rules in response to COVID-19, Congress passed and the President signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) on Friday, March 27, which included some provisions applicable to employee benefit plans. The following summarizes available provisions within the CARES Act that businesses should consider:
- Under the CARES Act, distributions made on or after Jan. 1, 2020, and before Dec. 31, 2020, may be eligible for a 10 percent penalty waiver on distributions up to $100,000 for individuals who are under 59½ years of age, have been diagnosed or have any immediate family members who have been diagnosed with COVID-19, or anyone who has suffered financially due to the pandemic (i.e., including being quarantined, furloughed, laid off, work hours reduced, lack of child care due to virus, closing or reduced hours of a business owned/operated by individual with such virus or other factors as determined by the U.S. Secretary of Treasury). Those who meet these qualifications are considered a “Qualified Individual.” Plan administrators only need to rely upon the certification of the employee if they satisfy the conditions to be a Qualified Individual. Qualified Individuals are presented with two options:
- If elected to not repay distribution, taxpayers can elect to include their distribution in gross income ratably over three years, beginning in tax year 2020.
- If elected to repay, taxpayers can pay any time within three-year period beginning on day after the date distribution received. Repayment is treated as a 60-day tax-free rollover.
- Under the CARES Act, a Qualified Individual can obtain a loan up to the lesser of $100,000 or up to 100 percent of vested balance for any loan made during the 180-day period beginning on March 27, 2020 (normally loans cannot exceed $50,000 or half of the participant’s vested balance).
- Delayed repayment is available for one year on outstanding loans on or after March 27, 2020, for payments due between March 27, 2020, to Dec. 31, 2020.
- The CARES Act also provides for Required Minimum Distributions that commence in 2020 to be waived to commence until 2021.
- Participants also have the availability, to the extent allowed by the plan’s provisions, for hardship withdrawals and in-service distributions if they do not meet the requirements to receive any of the above.
- Safe harbor matching or non-elective contributions for 2020 can be suspended if the employer meets either of the following:
A 30-day advanced notice must be given to participants prior to suspension of contributions and when the plan becomes subject to ADP testing for the year. No plan amendment is necessary.
- Business is operating at an economic loss; or,
- Employers included a statement in the annual safe harbor notice that the safe harbor contribution might be reduced or suspended during the year.
- Modifications of any non-safe harbor mandatory matching contributions can be made but require a plan amendment and appropriate advanced notices associated therewith.
- Any discretionary non-elective or matching contributions can be suspended.
- If permitted by the plan, certain expenses relating to the administration of the plan can be charged to the plan directly.
- Employers should seek to maximize use of forfeited employer contributions under the permitted reasons outlined in the plan document.
This brief summary touches various provisions in the Internal Revenue Code and recently issued in the CARES Act, but is not intended to be comprehensive. You are encouraged to consult your plan’s third- party administrator or legal counsel for more specific guidance on how these provisions may impact you and your participants.
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