Tag Archives: CARES Act

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.

COVID-19 and minimum required contributions for single employer defined benefit plans

The COVID-19 pandemic has precipitated short-term and long-term economic responses that will continue to unfold. In the meantime, employers have many questions regarding Internal Revenue Service (IRS) minimum required contributions (MRCs) for their defined benefit plans.

In this article, Milliman actuary Esther Peterson summarizes the components that feed into the MRC calculation and considers how potential consequences may trickle down into the MRC calculation for future plan years.

Critical Point explores retirement plan implications of CARES Act

The Coronavirus Aid, Relief, and Economic Security (CARES) Act has many provisions that will affect both defined benefit plans and defined contribution plans. In this episode of Critical Point, Milliman’s Charles Clark and Ginny Boggs talk about the CARES Act and its implications for retirement plans.

To hear past episodes of Critical Point, click here.

How should DB plan sponsors consider responding to the COVID-19 crisis?

At present, the severity and duration of the COVID-19 pandemic are unknown, and the same is true of the impact on the economies of the United States and other countries. However, the effect on pension plans will certainly be negative.

Congress did respond quickly by passing the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which provides a record-shattering $2 trillion in stimulus, including some immediate relief for plan sponsors. Despite the ongoing uncertainty, there are some helpful guidelines for corporate pension plan sponsors based on past experience as well as the market data already in the books through the first quarter of 2020.

In this article, Milliman’s Zorast Wadia addresses the likely impact on pension expense and funded status. Additionally, he discusses the impact of the CARES Act on required cash contributions in calendar year 2020. Zorast also points out some red flags to look for over the next few years and details strategic steps that plan sponsors can begin taking now to help mitigate some of the risks in these unprecedented circumstances.

Forty percent of Milliman single employer DB plan clients defer contributions under the CARES Act

In the first general survey of defined benefit (DB) pension plan sponsor actions under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Milliman consultants report that, in 40% of their clients’ DB plans, cash contributions that would have been due on April 15, 2020, prior to the CARES Act were deferred. The due date was extended to January 1, 2021, under the CARES Act.

Milliman has written many times about the CARES Act since it was enacted on March 27. However, this is the first evidence of how employers sponsoring these plans have reacted to the new law and the strategic use of cash to finance current workforce obligations compared to long-term financial promises to plan participants during the extraordinary hardships imposed by the COVID-19 pandemic. CARES has given them some statutory relief to better assess ongoing cash commitments to these pension plans.

We acknowledge that some of our clients have other reasons under pension rules that did not require contributions before April 15. Such reasons could be that their plans were at least 100% funded or that prior contributions over the past years in excess of the statutory minimum amounts permitted them to use a “credit balance.”

We plan to follow up with more details as we discuss 2020 funding strategy with plan sponsors.

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.