To provide you with an update on recent pension legislation, called “The CARES Act”. (This stands for “Coronavirus Aid, Relief, and Economic Security Act”).
You have an Important Option!
Some of the beneficial features of the CARES Act are optional. You need to make an election to use them. We will outline this for you clearly, in the “Distributions and Loans” section, just below.
1. Distributions and Loans
Congress wanted to make it easier for plan participants to be able to access their retirement funds during this emergency, so they have temporarily relaxed the payout and loan rules. But this relaxation applies only if the Plan Sponsor elects it. Due to the hectic nature of our world today, we are going to assume that you do wish to allow for these new provisions to take effect, unless you tell us otherwise by 4/20/20.
A. Allow for “In-Service” Distributions
Normally, an employee can only access their 401(k) funds if they have a “distributable event”, such as termination of employment, retirement, disability, or death. To allow easier access to these funds, you may now let an “affected employee” withdraw up to $100,000 from their account. Note, too, that these payouts can occur from Cash Balance and Defined Benefit plans, as well.
Who is an “affected employee”? This includes an employee (or a spouse/dependent) who is diagnosed with COVID-19. Also, if the employee endures financial hardship as a result of the virus, they, too, will qualify. This might include layoff, furlough, quarantine, reduced hours, or inability to work due to a (COVID-related) lack of available childcare. This sounds like a lot of people we all know. Rather than playing detective, the Act allows you to rely upon “self- certification” by the employee that they are affected in this way.
Congress was also gentle on the aspect of taxation. Normally, there is a 10% excise tax on premature payouts, but this is waived. Further, employees can (a) spread their income taxes out evenly over 3 years, and (b) have the option of repaying their distribution back to the plan or to their IRA, within that 3-year period. There is no need to withhold the 20% tax rate that normally applies to cash payouts.
B. More Generous Rules on Plan Loans
Keeping with the theme, the CARES Act also makes it easier for plan participants to get a loan. The old limits were that an employee could receive up to 50% of their vested account balance, with a maximum limit of $ 50,000. The Act revises these limits to 100% of the vested account balance, with a limit of $100,000. Please note that this temporary provision applies only through 9/23/20.
Further, the Act offers relief for those who are now repaying their loans. Any loan payments due between now and the end of 2020 can be delayed, for up to one year. Interest will continue to accrue. When the payments commence again, we’ll need to re-amortize the loan. The normal maximum repayment period (5 years) can be extended by up to a year in this manner.
Again, this relief applies to “affected” plan participants only, as described above, i.e., only those whose health or finances have been affected by the virus.
Finally, note that these new rules about payouts and loans are temporary provisions, that expire after 2020. Plan documents will need to be amended by 12/31/22, which will probably coincide with the next round of 401(k) plan document restatements. We expect that many of the investment platforms will be advising plan participants of these new rules shortly. However, we can assist you in this regard.
Remember, though, that these new rules only take effect if you want them to. We are going to assume, if we don’t hear back from you, that you do want to take advantage of these new loan and distribution rules. If you do not now have a loan provision in your plan, however, we’ll ignore that aspect.
2. Waiver of Required Minimum Distributions for 2020 (“RMD’s”)
Due to the recent market drop, there is concern that 2020 required RMD’s (now at age 72, not 70 ½) will cause an undue burden. This is because the amount of the 2020 required payout is based upon plan participants’ 12/31/19 balances, pre-drop. Since plan assets today are so much lower, taking that same dollar amount (determined from the 12/31/19 balance) is now viewed as punitive, since it represents a much higher percentage of the account than what Congress intended. As a result, the CARES Act suspends required payouts for 2020.
If the RMD has already been paid out, it can be repaid back into the plan or rolled into an IRA. Taxes will continue to be deferred. The IRS is expected to relax the 60-day rollover rule for IRA’s, for this purpose.
Note, too, that this suspension applies to those who reached age 70 ½ (old rules) in 2019, and took their RMD’s from the plan between 1/1/20 and 4/1/20. Those payouts can be returned or rolled over. Those who took their 2019 RMD during 2019 are not offered any relief under this bill. This provision does not apply to Cash Balance/Defined Benefit plans, because those plan participants’ RMD’s were not affected by the market drop in the same way.
3. Cash Balance/Defined Benefit Funding Relief
Congress is well aware that many plan sponsors can not now pay their required contributions into “pension plans”, such as these, so the CARES Act provides relief. Any required contribution due for the rest of 2020 can now be made by 1/1/21. This might include minimum funding requirements, normally due by 9/15/20, and quarterly contributions, as well. Interest will accrue on these delayed contributions.
CB/DB plans also have a mechanism that measures and certifies their funded percentage, called an “AFTAP”. If the funded percentage drops below a certain level, then restrictions on lump sums and benefit accrual apply. The Act includes some relief for these calculations, allowing that the 2019 certification can also be used for 2020. It’s unclear how helpful this provision will be.
4. Other/Non-CARES Act
While we’re at it, we also wanted to mention that the IRS has delayed the due date for restating 403(b) (normally due 3/31/20) and CB/DB (normally due 4/30/20) plan documents, by 90 days. We have already completed these documents for most of our clients.
We are also hoping for relief on the due date for 5500 Tax Forms, typically due 7/31/20. Our industry Association (“ASPPA”) has requested a “mass extension” for all plans, allowing for a 10/15/20 due date.
There is also some discussion of suspending required contributions into 401(k) plans, such as the 3% safe harbor contribution. We’ll let you know more about this when or if we hear more.
Finally, we thank you for being a Client or Friend of Metro Benefits. We enjoy working with you, and we want to help. Please contact (e-mail is the way to go, for now) your Analyst or Managing Consultant if we can provide further assistance. We will get through this together.