Tag Archives: 401(k)

COVID-19: So many questions for employers about their 401(k) plans (pt. 2, updated December 2020)

The year 2020 saw COVID-19 challenges for plan sponsors and participants across the retirement industry. My prior blog asked the following questions: (1) Are 401(k) savings plans facing “partial plan terminations”? (2) What will happen with 401(k) safe harbor plan contributions? (3) Can employer matching contributions be suspended?

This update addresses a change for partial plan terminations.

What about partial plan terminations? Hot off the press, in the $900 billion COVID-19 stimulus package just passed by Congress, partial terminations are addressed.  As a refresher, “partial termination” is a term in the tax code. It means there has been more than a 20% reduction in an employer’s workforce due to unforeseen business circumstances causing financial issues or a business downturn during the year. It results in 100% vesting of retirement benefits for those employees affected, meaning the employees who lost their jobs.

The bill states: A plan shall not be treated as having a partial termination (within the meaning of 411(d) (3) of the Internal Revenue Code of 1986) during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021 is at least 80 percent of the number of active participants covered by the plan on March 13, 2020.

What does this mean? Plan sponsors of defined contribution retirement plans—401(k), profit sharing—will not incur a partial plan termination if the active participant count in the plan at March 2021 is 80% of the active participant count at the time the COVID-19 national emergency was declared.

Although the new legislation is for this time period only, it may help alleviate financial difficulties for businesses across all industries. For businesses that have been able to successfully weather the financial downturn, rebuild their business, and hire and rehire more staff, a partial termination worry is not there.

For information on these topics or the Coronavirus Aid, Relief, and Economic Security (CARES) Act related to COVID-19, contact your Milliman consultant.

Understanding the impact of employees furloughed due to COVID-19 on defined contribution plans

In the wake of the coronavirus outbreak, one of the many issues plan sponsors face is determining whether employees will be furloughed and for how long.

What is a furlough?

A furlough is defined as an employer-implemented mandatory leave of absence from work, typically without pay—very similar to a temporary layoff or approved unpaid leave of absence. The idea is that workers will one day be able to return to their work.

What effect does an unpaid leave or furlough have on retirement 401(k) plans?

While furloughed employees still technically retain their jobs, they cease actively working for their employers and may or may not earn salaries. An employee on an unpaid furlough clearly would not be able to make new salary deferrals. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, an employee on an unpaid furlough is permitted a delay of up to one year for making loan repayments with due dates that fall between March 27, 2020, and December 31, 2020. Employer matching contribution obligations to a defined contribution (DC) retirement plan such as the 401(K) generally will cease once employee salary deferrals are discontinued, but employer “profit sharing” or nonelective contributions still may be due, depending upon the terms of the plan.

Employers will need to be vigilant when monitoring outstanding participant loans to ensure that any delinquencies are addressed promptly. In addition, the expanded availability of participant loans and hardship distributions under the CARES Act likely will create additional administrative work for employers where furloughed employees are involved.

Furloughed employees will not accrue hours of service if they are not working or receiving salaries. If no hours of service accrue, it may impact vesting as well as eligibility requirements for plan participation or contribution allocations. Upon returning to work from an unpaid leave or furlough, an otherwise eligible employee generally would be entitled to immediate reenrollment in a retirement plan.

Although a furlough is not a severance from employment, the Internal Revenue Service (IRS) could take the position that employees furloughed on a long-term basis, because of COVID-19, could be considered to have a severance from employment.

How does a furloughed employee, impacted by COVID-19, access retirement plan accounts?

The CARES Act has provided some relief for furloughed employees affected by COVID-19. Please refer to this Milliman benefits update to read more about coronavirus-related distributions (CRDs) and relaxed loan rules.

What about hardship withdrawal options because of this national emergency? Many plan documents state that hardships are allowed for the IRS safe harbor reasons. While the IRS safe harbor permits hardship withdrawals related to a Federal Emergency Management Agency (FEMA)-declared disaster, the state or area of primary residence would not only need to be declared a disaster area, but also must qualify for individual assistance. Without this specific situation applying, to permit these distributions, plan sponsors have to be comfortable deviating from the IRS safe harbor list of permissible hardship events.

If a plan sponsor would like to add a non-safe harbor hardship withdrawal in connection with COVID-19 and/or furloughs and layoffs, then a plan amendment is likely required.

The No. 1 question 401(k) participants are asking during the COVID-19 market swings—and how to respond

Should I make a change? That’s the No. 1 question 401(k) plan participants are asking Milliman Retirement Educators during the COVID-19 market downturn.

Other frequent questions we are hearing in participant one-on-one virtual consultations during the COVID-19 pandemic include:

  • Should I move my account to the stable value fund until this COVID-19 pandemic is over?
  • I’m 60―will I ever be able to recover from this market fall?
  • I was going to retire at the end of this year. Now what should I do?

So how do Milliman Retirement Educators—and how can you as a plan sponsor—respond to these questions without giving advice?

Very carefully. Sometimes answering a question with a question prompts participants to come to their own conclusions. The question to any of these questions is, “Have your retirement goals changed?” The answer is typically, “No.” We find that most people have the same time horizon and the same savings goal. So what do you do?

How to respond

Here are three tips to use when responding to participants’ questions. Have them think through these factors and answer these questions:

  1. Review your time horizon. At what age do you plan to retire? When do you plan to start taking money from this plan? What should someone who is about to retire do? If you retire this year, or within the next five years, it doesn’t mean you’re going to take out all of your money at that time. For most, this money will be spent over the next 20 to 30 years in retirement. If you have 10 or more years until retirement, time is on your side. Over 10 years is considered long-term when it comes to investing. For many, staying put, staying calm, and not rushing to move money to cash can help recoup the loss when the market rebounds. Milliman produced a short video, Responding to Market Volatility, that may help restore confidence in the market.
  2. Review your asset allocation. Based on your time horizon and risk tolerance, are you invested appropriately? If invested in a target date fund based on your anticipated retirement date, then you can take comfort in knowing the professionals are managing your money and making adjustments as needed as you near retirement. If you are a “do-it-yourselfer,” and are concerned that you are not in the right asset mix, then take a risk tolerance quiz or use an asset allocation tool on your 401(k) participant website. Make adjustments based on your results, not on emotion.
  3. Think positive in a negative market. During a market decline, remember that if you continue to save and invest, you are buying investment shares at lower prices, which will put you in position for the greatest gains when the market rebounds. Milliman has a podcast, What To Do When. . . The Market Declines, that may help you navigate today’s complex financial decisions. Generally speaking, those who continue investing during market corrections are more likely to achieve long-term success.

Therefore, the basic answer to the question, “Should I make a change in my retirement account?” is, “Have your retirement goals changed?” If not, then experience tells us that you’ll be better off if you hold steady and wait for the market to rebound, or even consider saving more to take advantage of low investment share prices. For employees nearing retirement and seeking investment advice, several resources are available to help research and select a Certified Financial PlannerTM, including http://www.cfp.net/ and http://www.finra.org/.

Deciding what to do with your retirement account is an important financial decision. Milliman cannot offer financial, investment, or tax advice. You may want to consult with a personal financial advisor or tax advisor before making your decision.

COVID-19: So many questions for employers about their 401(k) plans

COVID-19 is causing the retirement plan world to rapidly change and keeping up with the pace is challenging.

  • Are 401(k) savings plans facing “partial plan terminations”?
  • What will happen with 401(k) safe harbor plan contributions?
  • Can employer matching contributions be suspended?

The questions are coming from all sides and even showing up on page 1 of the Wall Street Journal. Not every situation has a clear-cut answer, let alone the right answer.

What about partial plan terminations? “Partial termination” is a term in the tax code. It means there has been more than a 20% reduction in an employer’s workforce due to unforeseen business circumstances causing financial issues or a business downturn during the year. It results in 100% vesting of retirement benefits for those employees affected, meaning the employees who lost their jobs.

The current economic environment is causing financial difficulties for businesses across all industries, and we are starting to see some 20% or more reductions of staff in workforces. Partial terminations are based on facts and circumstances as well as the time period of economic difficulty. If the business is able to successfully weather the financial downturn, rebuild its business, and hire and rehire more staff, then there is not a partial termination. If over the next year a business is not able to recover, and more employees lose their jobs, then we might assume there is a partial termination and 100% vesting for terminated participants applies.

What about the required 401(k) safe harbor contributions? How can employers continue these contributions if they are facing financial difficulties? As in past adverse business conditions, employers should be able to suspend the safe harbor match or the safe harbor nonelective contribution midyear but only if one of these two conditions is met:

  1. The employer is operating at an economic loss for the plan year.
  2. The notice provided at the beginning of the 2020 plan year includes a statement that the employer may reduce or suspend the contribution midyear.

If one of these two conditions is met, then the employer provides a supplemental notice at least 30 days before the effective date of the suspension, which then allows employees to have a reasonable opportunity to change their deferral elections before the suspension.

Administratively it is more work for the employer to make this change midyear. The 401(k) plan has to complete its actual deferral percentage (ADP) testing for the entire year using the current testing method. This may result in test failures and refunds of employee contributions.

If the employer contributions are discretionary, then the employer is not required by any regulation to make a contribution nor is there a mandatory participant disclosure requirement about the suspension. In addition, there is no plan amendment needed to discontinue the contribution.

If the employer contribution is defined in the plan document, then employers must ensure that suspending the contribution doesn’t reduce participant benefits already accrued by the amendment date, as accrued benefits are protected. For example, if the employer contribution is a 3% match and it is only allocated to participants if they make salary deferrals, future matching contributions can be suspended or reduced as they are not yet accrued and so not considered protected.

For information on these topics or the Coronoavirus Aid, Relief, and Economic Security (CARES) Act related to COVID-19, contact your Milliman consultant.

One 401(k) feature may help employees save for healthcare expenses in retirement

With rising healthcare costs and people living longer, trustees of multiemployer plans may want to ask themselves: How can we better support our members in retirement when addressing healthcare costs?

Many union members receive a traditional pension plan. However, they should ask themselves if the benefit will be enough to cover both daily and unplanned expenses in retirement. One potential solution is to allow members to save for their retirement healthcare needs via a voluntary, supplemental retirement system, specifically a 401(k) plan.

If a trustee decides to implement a new 401(k) feature that allows members to save for retirement and commensurate healthcare-related costs, there are some specific design features that need to be addressed. Milliman’s Tom Carrabine provides perspective in his Implement a 401(k) component to offset healthcare costs in retirement.

Retirement plan changes could make sponsors feel less SECURE

Retirement plan sponsors and their third-party administrator (TPA) business partners need to understand the implications of two SECURE Act provisions involving complex changes to human resources (HR) administration systems and savings plan calculation engines. One is a mandatory change concerning long-time part-time employees who may qualify to participate in an employer’s retirement plan if they meet the requisite hours worked for three consecutive years. The second is a voluntary change related to qualified birth or adoption distributions.

In this article, Milliman consultants Charles Clark and Deborah Lachner explain some of the complexities resulting from these provisions and highlight actions plan sponsors can take to avoid being caught off guard.