Employee benefit plan large filers – Meeting your compliance and fiduciary requirements

The impact of COVID-19 on employee retirement plans

Authored by Franci Suter

Economic interruptions can undoubtedly cause havoc on employee retirement plans. While this is an area that is constantly evolving, plans have already been significantly impacted in many ways since COVID-19 swept the United States. Plan sponsors are encouraged to consult their trusted third-party advisors to determine how to proceed and navigate the changing landscape, including key impacts below.  

Form 5500 deadline extension (1)

On April 9, 2020, the Internal Revenue Service (IRS) published Notice 2020-23, Form 5500 Filing Relief

Form 5500 due to be filed (originally or pursuant to a valid extension) on or after April 1, 2020 and before July 15, 2020, with the relief, the due date for filing is July 15, 2020

As of the date of this article, no extension has been approved for calendar year end plans.

Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) (2)

Key provisions include:

Hardship distributions
Allows participants who meet “COVID-19 event” definition (as subsequently defined), to take a coronavirus-related distribution of up to $100,000 from their retirement plan or individual retirement account (IRA) without a 10% early withdrawal penalty. Eligible distributions can be taken up to Dec. 31, 2020. Coronavirus-related distributions may be repaid within three years, or a participant can elect for these withdrawals to be included in taxable income on a pro rata basis over a three taxable year period. (Sec. 2202)

Participant loans
Allows participants who meet “COVID-19 event” definition to borrow up to $100,000 from qualified plans (an increase from $50,000 previously allowed), and repayment may be delayed for one year. (Sec. 2202)

Required minimum distributions (“RMD”)
Temporarily suspends RMDs for 2020, which allows participants to keep funds in the Plan. (Sec. 2203)

Single employer defined benefit plan provisions:

Defers 2020 minimum required contributions (including quarterly contributions) for single-employer plan to Jan. 1, 2021. The amount of any deferred contribution is increased by interest accruing for the period between the original due date for the contribution and the payment date at the effective rate of interest for the plan for the plan year, which includes such payment date. (Sec. 3608)

COVID-19 event definition:

Plan administrators can rely on employee certification that one of the below criteria was met:

  • Participant was diagnosed with COVID-19
  • Spouse or dependent was diagnosed with COVID-19
  • Participant experienced adverse financial consequences from COVID-19 (quarantined, furlough, laid off, reduced hours, etc.)

Plan amendment:

Plans can adopt the aforementioned provisions effective immediately. If adopted, the plan will need to be amended on or before the last day of the plan year beginning on or after Jan. 1, 2022.

Partial plan terminations (3)

An employer who is considering a large layoff or closing a location or division must also consider the impact on the retirement plan, specifically partial termination regulations. Typically, when 20% of total plan participants are laid off in a particular year, a partial termination is deemed to have occurred. There are several requirements that are automatically enacted once this occurs.

Many employers have furloughed employees instead of executing layoffs. Generally, if furloughed, an employer would not be included in the calculation of a partial plan termination, assuming there is an intent to rehire. 

The partial plan termination guidance provided by the IRS discusses a “severance from employment;” however, there is no specific definition of a “severance from employment.”  Generally, an employer would need to consider whether there has been a bona fide severance, whether they are treated as an employee for other purposes (i.e., still on the company’s health plan and not Consolidated Omnibus Budget Reconciliation Act (COBRA)), and whether there is a reasonable expectation that the employee will no longer perform services. Most furloughed employees have not had a severance from employment, as the employer reasonably expects them to come back to work at some point (i.e., they will perform services in the future) and they are treated as an employee for health plan purposes. 

Another consideration is whether the employees are considered “terminated” in the trustee/record-keeper system, which would warrant eligibility for a full account distribution as affected participants of a partial plan termination are immediately 100 percent vested in their account balances.  The consideration of terminated participants for partial plan termination would include only involuntary terminations, voluntary terminations, retirement and death would not be included in this assessment.

When participants are considered “on leave” or furloughed, they would only be eligible for the CARES Act COVID-19 hardship distribution or loan and potentially a normal hardship distribution or loan.

Employers may also credit imputed service during the furlough, taking the position that the furlough did not adversely impact the employees’ rights to vest in their plan benefits. 

IRS definition of furlough:

A furlough is the placing of an employee in a temporary non-duty, non-pay status because of lack of funds.

Electronic disclosures

On April 16, 2020, Department of Labor (DOL) sent a proposed rule on electronic disclosures to the White House’s Office of Management and Budget for review. This would allow a plan administrator to furnish one notice electronically of all or some of the below documents:

  • Summary annual report
  • Summary plan description
  • Summary of material modifications
  • Qualified default investment alternative

On April 28, 2020, the DOL’s Employee Benefits Security Administration (EBSA) extended the time for notices and disclosures required by Title I of ERISA, if a good faith effort was made to furnish the documents as soon as administratively feasible. A good faith effort includes delivery by an electronic means of communication. This applied to notices and disclosures that were to be furnished between March 1, 2020 and 60 days after the announced end of the COVID-19 National Emergency. (Notice 2020-01) (5)

Elimination of matching provisions

Safe Harbor match (4)
If the Safe Harbor notice included a statement that the plan administrator could reduce or eliminate, the match during the plan year or the employer is operating at an economic loss for the year, the employer can amend the plan to reduce or eliminate the Safe Harbor match 30 days after the supplemental notice is provided to employees. This will result in loss of the plan’s Safe Harbor status for the plan year.

Discretionary match
The discretionary match can be eliminated with a formal board or committee vote or sent through a means of communication to plan participants.

Non-discretionary match
A formal plan amendment will be required to reduce or eliminate non-discretionary matching contributions.

Cash out of vacation, PTO and sick time

Should these post-severance cash outs be eligible earnings for deferral and matching contributions depends on the terms in your plan document.

Contribution delays (5)

The DOL will not take any enforcement action for participant contribution and loan repayment delays between March 1, 2020 and 60 days after the announced end of the COVID-19 National Emergency, for delays related to the COVID-19 outbreak.

Baker Tilly COVID-19 support

During this uncertain time, Baker Tilly is ready to help you with practical advice on informing and supporting your employees as well as keeping your business running.

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