COVID-19 Plan Document and Administration FAQs

ASC response:
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted on March 27, 2020. The CARES Act, often referred to as the Stimulus Package, includes several provisions that affect retirement plans. The CARES Act makes it easier for plan participants to access retirement savings through tax-favored distributions, relaxes certain participant loan limitations, allows a temporary waiver of required minimum distributions, delays payments of minimum required contributions for defined benefit plans and provides relief for defined benefit plan sponsors for benefit restriction purposes.

Tax-favored distributions from retirement plans
The CARE Act waives the 10% early withdrawal tax under Code §72(p) and allows retirement plans to make “coronavirus-related distributions” without violating in-service distribution restrictions. To qualify for this special treatment, the plan must make the coronavirus-related distribution on or after January 1, 2020 and before December 31, 2020 and the aggregate distributions cannot exceed $100,000 (including all plans maintained by members of the same related employer group. A coronavirus-related distribution is a distribution to an individual (1) diagnosed with the COVID-19 virus, (2) whose spouse or dependent is diagnosed with the COVID-19 virus, or (3) who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of  child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease or other factors as determined by the Secretary of the Treasury. A plan administrator may rely on a participant's certification that he/she qualified for a coronavirus-related distribution. 

An individual receiving a coronavirus-related distribution may spread the income tax ratably over a 3-year period or may elect to have the entire amount included in income in the year of distribution. In addition, the individual may repay the coronavirus-related distribution (or a portion) back to the plan or to an IRA as a rollover at any time within three year period beginning on the date of the distribution.

These CARES Act provisions are very similar to disaster-related relief provisions enacted through previous laws (e.g., the Taxpayer Certainty and Disaster Tax Relief Act of 2019, the Bipartisan Budget Act of 2018, the Tax Cuts and Jobs Act of 2017, and the Disaster Tax Relief and Airport and Airway Extension Act of 2017).  

Relaxation of participant loan requirements
For the 180 day period beginning on the enactment of the CARES Act, a participant who is eligible to receive a coronavirus-related distribution may receive plan loans in an amount not to exceed the lesser of $100,000 (rather than $50,000) or 100% (rather than 50%) of the participant's vested account balance (accrued benefit). Also, a participant who is eligible to receive a coronavirus-related distribution who has an outstanding participant loan or obtains a loan may defer any loan payments due between the date of enactment of the CARES Act (March 27, 2020) and December 31, 2020. 

Temporary waiver of required minimum distributions for certain plans (rev 4/1/2020)
The required minimum distribution rules under Code §401(a)(9) are waived for the 2020 calendar year for certain plans. These plans include defined contribution plans under Code §§401(a), 403(a) and 403(b), governmental Code §457(b) plans and IRAs. The waiver rules do not apply to defined benefit plans. 

The waiver may include distributions required to be made by April 1, 2020 for individuals that attained age 70 ½ in 2019.  If an individual receives a distribution after December 31, 2019 that is eligible for waiver, the individual may rollover the distribution. Please note, however, that, if all or a portion of a distribution during 2020 is an eligible rollover distribution because it is no longer a required minimum distribution under this provision, the distribution shall not be treated as an eligible rollover distribution for purposes of the direct rollover requirement under Code §401(a)(31), the notice and written explanation of the direct rollover requirement under Code §402(f), as well as the mandatory 20-percent income tax withholding for eligible rollover distributions under Code §3405, to the extent the distribution would have been a required minimum distribution for 2020 absent this provision. 

This temporary waiver of required minimum distributions is similar to the waiver granted under the Worker Retiree and Employer Recovery Act of 2008 (WRERA) after the 2008 recession. We expect the IRS will provide guidance similar to that provided for the WRERA provisions under IRS Notice 2009-82. 

The reason for the waiver is so participants are not required to take distributions at a time when their account balances are significantly reduced due to poor economic conditions.

Delay in payment of minimum required contributions for defined benefit plans
Plan sponsors of defined benefit plans may delay minimum required contributions under Code §430 that otherwise would be due during 2020 (both quarterly and year-end contributions) until January 1, 2021. The plan sponsor will need to increase the contribution for interest for the period between the original contribution due date and the actual payment date.

Relief  from benefit restriction requirements
The CARES Act provides relief from the requirements under Code §436, which restricts certain lump-sum payments, plan amendments and benefit accruals if a defined benefit plan is significantly underfunded. Under the relief, for benefit restriction purposes, defined benefit plan sponsors may elect to use the plan's adjusted funding target attainment percentage for the last plan year ending before January 1, 2020 as the adjusted funding target attainment percentage for plan years which include the 2020 calendar year.

Plan amendments (rev 4/1/2020)
Generally, plan amendments reflecting CARES Act provisions are not required until the end of the 2022 plan year (2024 for governmental plans). In the meantime, plans may (but are not required to) operationally apply the provisions. ASC will provide a CARES Act Operational Checklist for plan sponsors and document providers to track operational application of the provisions. The ultimate plan amendment will need to conform to plan operation.

With respect to the disaster-related provisions of the CARES Act, ASC will likely follow the approach we adopted for other disaster-related relief laws.  That is, ASC will provide an interim amendment for adoption by all ASC document clients, but the amendment will indicate that it only applies if the plan sponsor (employer) operationally applied the disaster-related relief provisions. 

With respect to the waiver of the required minimum distribution rules, ASC will likely provide an interim amendment that allows participants to elect to waive or not waive their 2020 required minimum distributions. In situations where a participant does not make an election, the interim amendment likely will provide plan sponsors with the option either to make or not to make required minimum distributions for 2020.  This was the approach ASC used in our PPA documents.  Based on IRS guidance, ASC may consider other options.

ASC Response:  
Yes! On March 27, 2020, the IRS extended deadlines for Pre-approved 403(b), PPA DB and CB plan restatements.

• 403(b) Plans. The IRS has extended the last day of the initial remedial amendment period for Section 403(b) plans from March 31, 2020 to June 30, 2020. Thus, employers will now have until June 30, 2020 to restate their 403(b) plans onto a pre-approved 403(b) plan document.
• DB/CB Plans. The IRS has extended the end of the 2nd six-year remedial amendment cycle for pre-approved defined benefits plans from April 30, 2020 to July 31, 2020. Thus, employers will now have until July 31, 2020 to restate their DB and CB plans onto PPA DB or CB plan documents. 

 

ASC response:  
Numerous questions arise relating to whether a termination of employment or severance from employment has occurred that allows for a plan distribution.  As recent industry commentaries indicate, there is no consensus as to the legal status of a layoff, furlough, leave of absence and other events and whether they constitute a termination of employment or severance from employment that allows for a plan distribution. The determination generally relates to whether the employee's common law employment relationship with the employer has ended. This is clearly a factual (and difficult) determination.  Some questions that might be asked - Was the employment relationship terminated when he was "laid off"? If someone called the employer and asked if that individual was still employed, would the employer say no? Is the employee still eligible for benefits during the layoff? Is the employer holding a job open for this individual and expecting him/her to come back in a short period of time? Is it a temporary layoff or permanent?  

With regard to loans and leaves of absence, a plan may (but is not required to) suspend loans for up to one year for bona fide leaves of absence and for military leave.  See Section 13.07 of the BPD.   The regulations do not provide a definition for leave of absence.  Generally, a leave of absence is not considered a termination of employment and the participant remains an employee.  Industry advocates have asked the IRS to provide relief from the loan default rules for participants affected by the COVID-19 crisis.

We are hoping that the IRS and DOL will provide guidance on these situations. Also, it is likely that Congressional action may address some of these issues.  In the meantime, we encourage employers and plan administrators to make good-faith determinations (based on plan terms, loan policies, administrative policies, etc.) on specific situations, be consistent with these interpretations for all plan participants and clearly document the decision-making process.
 

ASC Response: 
Good question, especially after the SECURE Act changes. It is clear that under prior guidance including up to and including Notice 2016-16 that you would not be able to start the QACA again until the 1/1/2021 date. The SECURE Act allows an employer to amend a 401(k) plan into a nonelective safe harbor contribution plan after the beginning of the plan year for which the safe harbor rules will apply. The amount of the nonelective safe harbor contribution (either 3% of compensation or 4% of compensation) depends on timing of the amendment.  The question becomes, once you have unsafe-harbored a safe harbor plan can you re-safe harbor the plan in that same year? Unfortunately, we have not seen any guidance addressing that exact issue. The conservative and safer approach would be to delay amending back to safe harbor status until 2021.
 

ASC Response: 
You will find notices and resolutions for eliminating Safe Harbor Contributions on the DGEM Download page under 5 Miscellaneous Forms > Safe Harbor Plans. 
 

ASC Response:
Under the current rules, to take a safe harbor hardship distribution, the participant would need to qualify under one of the current hardship events. The final hardship distribution regulations added a new safe harbor (deemed) expense  - Expenses and losses (including loss of income) incurred by the Participant on account of a disaster declared by the Federal Emergency Management Agency (FEMA) under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, Pub. L. 100-707, provided that the Participant's principal residence or principal place of employment at the time of the disaster was located in an area designated by FEMA for individual assistance with respect to the disaster.  There is some question whether the current COVID-19 crisis qualifies as a declared disaster.  The ARA believes that it does.  If so, participants affected by the COVID-19 crisis may receive hardship distributions.  The IRS has been asked to clarify that this position is correct.

Yes, you could amend your plan to allow for non-safe harbor hardships. You'll also need to state the additional reasons under AA §10-3(f). The reasons you listed are extremely broad. Is the non-safe harbor provision intended to provide participants access to their money during a lay-off or reduction in work schedule or a spouse/partners lay-off or reduction in work schedule? If so, you could just write that in. 
 

ASC Response:  
ASC has made available (on the DGEM Download page) 2020 plan termination packages for defined benefit, defined contribution and 403(b) plans. These termination packages reflect changes made by the SECURE Act, the Miners Act and the Disaster Relief Act. Please note that many of the law changes are effective for PLAN YEARS beginning after December 31, 2019.  Plans with fiscal plan years may not be impacted by some of the law changes.  ASC also has developed a SECURE Act Checklist that on-going plans may use to document operational implementation of law changes prior to plan amendments.  The Checklist is available on the DGEM Download page.
 

ASC Response: 
This is really not a prototype issue. What you have laid out is a proper plan administration issue and whether there has been a fiduciary breach in not timely paying out the participant's distribution.   Given these facts, if there was an unreasonable delay in making the distribution, the employer may face potential liability for the losses incurred by the Plan participant. Of course, this is a facts and circumstances determination.  The plan fiduciaries should assess the reasons for the delayed distribution and amount of liability. Among the factors to consider are whether the plan's established procedures were followed and, if not, why.  Another question is who should bear the burden?  Is it reasonable to say that the participant should bear the burden for the errors of those administrating the plan?  If the employer is liable, it may want to look to its service provider's role in the delay in processing the distribution to determine if it failed its contractual responsibilities. If so, the employer may seek indemnification from the service provider. 

ASC Response: 
Yes, see Section 3.07 of the BPD. Under Section 3.07, an Employee may make a Rollover Contribution to the Plan from a qualified retirement plan or from an IRA, if the acceptance of rollovers is permitted under AA §C-2 or if the Plan Administrator adopts administrative procedures regarding the acceptance of Rollover Contributions.
 

ASC Response:
The Coronavirus Aid, Relief and Economic Security (CARES) Act includes a provision that would delay the due date for contributions due in 2020 until January 1, 2021. For a calendar year plan, this might mean quarterly contributions and minimum required contributions due from the 2019 plan year as well as 2020 quarterly contributions would not be due until January 1, 2021. Interest would be applied from the original due date to the proposed postponed due date. 

ASC Response:
The Coronavirus Aid, Relief and Economic Security (CARES) Act includes a provision that would allow plan sponsors to elect to treat the AFTAP for the last plan year ending prior to January 1, 2020, as the AFTAP for the plan year that includes the 2020 calendar year. Actuaries must weigh a number of considerations with issuing certified AFTAPs even in the normal course of providing actuarial services to the plan. Actuaries should be prepared to anticipate even more complexity with very little guidance even if relief is provided through legislative action. 

ASC Response:
There are two considerations for plan sponsors offering non de minimis lump-sum distributions:

• Plan sponsors should closely monitor whether or not the payment of a lump-sum distribution would violate the 110% current liability restriction on lump-sum payments to Highly Compensated Employees (HCEs).  Lump-sum distributions cannot be made to an HCE unless, after taking into account the amount of the lump-sum distribution to the HCE, the value of plan assets is equal to or greater than 110% of the current liabilities. With the financial turmoil in the markets, assets may be significantly reduced, leading to a restriction in the payment of a lump-sum distribution to an HCE unless additional contributions to the plan or additional measures are taken to protect the assets of the plan.
• Plan sponsors with AFTAPs below 80% may be subject to Section 436(d) restrictions on the payment of accelerated payments (lump-sums).  In the absence of AFTAP relief (see AFTAP question above), plan sponsors should be aware that lump-sums may not be payable to plan participants if poorly performing assets result in significant reductions in AFTAPs.

In the face of market volatility for plan participants electing a lump-sum distribution or taking a de minimis lump-sum, the amount of the lump-sum calculated will become far more attractive if the interest rates used to measure minimum 417(e)(3) lump-sum distributions decrease materially in response to the change in market rates used to set the 417(e)(3) assumptions.  That is, even in the absence of any of the two lump-sum payment restrictions noted above, plan sponsors may see an impact on their assets if the lump-sum amounts are larger than what they otherwise would have been.
 

ASC Response:
The PBGC has extended the deadline to July 15, 2020 for premium payments and other filings that would otherwise have been due on or after April 1, 2020 and  before July 15, 2020.  The relief is in keeping with the PBGC's disaster relief policy that extends PBGC due dates when the IRS extends due dates in response to major disasters.

ASC Response:
With the shelter-in-place requirements adopted throughout the country, plan administration is likely to be affected.  These are among the possible considerations for plan sponsors:

• The process for requesting benefit election forms. With no “in-office” HR administrators, a shift to electronic requesting and submission becomes necessary. 
• The process for accepting notarized benefit election forms/spousal consent waiver forms.  Creative online meeting tools may provide the ability to witness in the absence of access to a notary, and the ability to witness participant and spousal elections. 
• The manner in which plan sponsors issue plan notices (for example 101(j) notices when 436 restrictions are triggered) to participants where notices are routinely posted in common work areas.

ASC Response:
At this time, no extension has been announced. However, industry comment letters to the DOL and IRS have asked for a delay to the requirement to distribute excess deferrals by the April 15 deadline. (See Industry Comment Letters above.)

ASC Response:
At this time, no extension has been announced. However, industry comment letters to the DOL and IRS have asked for a 90-day extension to the deadline for correcting a failed ADP or ACP test and for distributing excess contributions and excess aggregate contributions under a plan (March 15 for a calendar year plan) without incurring a 10% penalty tax. (See Industry Comment Letters above.)

ASC Response:
The IRS and Department of Treasury released Notice 2020-23 on April 9, which provides extension relief to all taxpayers that have a filing or payment deadline falling on or after April 1, 2020 and before July 15, 2020.  This is good news for plans with a June 30 plan year end that filed an extension to April 15, 2020. Those plans now have until July 15 to file.  

For calendar year plans, no extension has yet been announced. However, in comment letters to the DOL and IRS, ARA and The SPARK Institute have asked for an automatic extension to the 5500 filing deadline. (See Industry Comment Letters above.)