Tag Archives: CARES Act

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.

Accounting and tax deduction are not changed by CARES Act delay in 2020 pension funding contributions

Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, in the case of any minimum required contribution for single-employer defined benefit (DB) plans that would have otherwise been due during calendar year 2020, regardless of plan year, the due date has been extended to January 1, 2021. The CARES Act is very specific to the section of the tax code that deals with minimum required contributions, Section 430, and nothing else. As of the writing of this blog post, the tax deductibility and treatment under GAAP accounting are not affected.

Regarding tax deductibility, contributions that are made up until eight and a half months after the end of the plan year can be deducted for the company’s prior tax year (assuming the contributions are within the maximum tax deductible limit for that tax year, and assuming the tax year and plan year are the same). This timing is in tandem with the last day to designate contributions for the prior plan year for minimum funding purposes. Under the CARES Act, the due date for any minimum required contribution otherwise due during calendar year 2020 has been extended to January 1, 2021, which may be past eight and a half months after the end of the plan year. However, the CARES Act does not extend the timing for tax deductions. As such, taking advantage of the delayed due date may postpone the tax deduction to the following tax year.

Regarding GAAP accounting, the CARES Act has no bearing. In order for a contribution to be included in the asset value as of the measurement date, the contribution must be deposited into the trust on or before the measurement date. As such, taking advantage of the delayed due date, if delayed past the end of the plan sponsor’s fiscal year, will affect the balance sheet position as of the measurement date.

Milliman is not a tax advisor nor an accounting advisor. Therefore, the information above cannot be construed as tax or accounting advice. The tax and/or accounting implications of any delayed contribution should be discussed with a qualified advisor.

Overview of CARES Act provisions

The Coronavirus Aid, Relief, and Economic Security (CARES) Act is the third piece of legislation passed in response to the coronavirus pandemic. In this Multiemployer Alert, Milliman’s Sean Silva and Reza Vahid describe Title III (Supporting America’s Health Care System in the Fight Against the Coronavirus), Part II (Access to Healthcare for COVID-19 Patients), Subpart A (Coverage of Testing and Preventive Services), of the CARES Act.

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.

RMDs 2020: An unexpected update

In January, I published a blog about the updates to required minimum distribution (RMD) rules that are due to the Setting Every Community Up for Retirement Enhancement (SECURE) Act.

As we are all keenly aware, things have changed dramatically since January. In that January blog, we mentioned that SECURE contained the first RMD changes since the Worker, Retiree, and Employer Recovery Act (WRERA) of 2009. On March 27, 2020, Congress passed and the President signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes, among many other relief items, a change very similar to the WRERA waiver of RMDs in 2009.

Below is an excerpt from the Milliman Benefits Alert sent to clients recently:

“Required minimum distributions (RMDs) for 2020 are waived for profit sharing, money purchase, 401(k), 403(b) and governmental 457(b) plans. Applies to all RMDs due during 2020, including 2019 initial RMDs due by April 1, 2020.

  • 2020 eligible rollover treatment. If any portion of a distribution made during 2020 would have been treated as a RMD absent this temporary waiver, it is eligible for rollover. However, the 20% federal income tax withholding can be ignored and the distribution is exempt from the IRC Section 402(f) notice requirements (rollover rights explanation).”

The main difference from the WRERA RMD waiver is that the CARES Act allowed for a waiver of all 2019 RMDs due to be paid in 2020. However, because of the timing, most of these RMDs have already been distributed from retirement plan accounts, as the deadline for distribution was April 1, 2020.

If sponsors elect to apply the waiver, they will need to amend their plan documents for this and all other CARES Act provisions by the end of the plan year starting on or after January 1, 2022.

CARES Act summary

The following is a summary of the retirement plan provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Defined contribution (DC) plan provisions

Distribution and loan relief to “qualified individuals” means either:

  • Participants (or their spouses or dependents) who have been diagnosed with a coronavirus disease (SARS-CoV-2 or COVID-19)
  • Participants who have experienced adverse financial consequences due to the virus resulting from:
    • Being quarantined, furloughed, or laid off
    • Having their work hours reduced
    • Being unable to work due to lack of childcare
    • Closing or reducing hours of a business they owned or operated

Required minimum distributions (RMDs) for 2020 are waived for profit sharing, money purchase, 401(k), 403(b), and governmental 457(b) plans. This applies to all RMDs due during 2020, including 2019 initial RMDs due by April 1, 2020.

  • 2020 eligible rollover treatment. If any portion of a distribution made during 2020 would have been treated as a RMD absent this temporary waiver, it is eligible for rollover. However, the 20% federal income tax withholding can be ignored and the distribution is exempt from the Internal Revenue Code (IRC) Section 402(f) notice requirements (rollover rights explanation).

Single-employer defined benefit (DB) plan provisions

All single-employer funding obligations due during calendar year 2020 can be delayed until January 1, 2021. Accrued interest must be added to the delayed payment(s). There is no distinction as to which plan year the DB plan contributions are due.

A plan sponsor may elect to use the single-employer DB plan’s funded status for the 2019 plan year to determine whether benefit restrictions must be administered. Benefit restrictions prevent the plan sponsor from paying “accelerated forms of distribution” such as lump sums.

The CARES Act is silent on RMDs for defined benefit pension plans.

Plan compliance/federal forms and notice distributions

Plan amendments deadline for adopting any of the relief provided under the CARES Act would be no earlier than the last day of the first plan year beginning on or after January 1, 2022 (January 1, 2024, for governmental plans).

The U.S. Department of Labor (DOL) will have additional authority to postpone certain deadlines that apply to ERISA-covered plans for a public emergency declared by the U.S. Department of Health and Human Services (HHS), which would include the current public emergency for COVID-19. We believe this will apply to ERISA compliance deadlines, such as Form 5500, annual funding notice, quarterly (or other periodic) participant statements, and others. This is not an exhaustive list. We note that it is unclear whether the postponement authority for DOL extends to Treasury or the Internal Revenue Service (IRS) for compliance deadlines under IRS authority.