COVID-19 Plan Document and Administration FAQs

ASC responses to common client questions

COVID-19 Plan Document and Administration FAQs

ASC responses to common client questions
These FAQs are in response to the numerous plan document and plan administration questions ASC has received from clients.

Check back often! We continuously update these FAQs as we address new issues or receive updated information from the Internal Revenue Service (IRS) and the Department of Labor (DOL). Additionally, the information we provide through these FAQs is intended to be accurate, however, many questions present difficult issues. You should consult with legal counsel on specific issues and factual situations.

If you have additional questions email support@asc-net.com.
4/23/2020 COVID-19 Webcast Q & A

Industry Comment Letters
Tax Filing and other Relief Requested due to Coronavirus Impact #1 – ARA 
Tax Filing and other Relief Requested due to Coronavirus Impact #2 – ARA
403(b) Restatement Deadline Extension Request – ARA 
Request for Relief and Guidance Because of COVID-19 – The SPARK Institute
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Extensions of restatement deadlines (Rev 3/27/2020)

Question:
I am wondering if the IRS is considering extensions of the 403(b) plan restatement deadline (currently March 31, 2020) and/or the defined benefit plan restatement deadline (currently April 30, 2020)?

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. 

 
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Termination of Employment/Severance from Employment/Leave of Absence (3/26/2020)

Question:
I have some interesting thoughts and questions. A number of our employers have contacted us regarding the issues with the COVID-19 recommendations. Some are doing temporary layoffs, with some or all of the staff immediately applying for unemployment benefits. Some employees may continue to work and receive unemployment benefits at the same time (if allowed under state law). Some businesses may close temporarily while considering what to do, but still deem their employees as employed and not terminated. Most of our plans allow some in service distributions, and/or hardship distributions. Most require repayment of outstanding loans as of the date of termination.

Due to all of the uncertainties, currently my questions are: If an employer is doing what is deemed as a temporary layoff, is the Participant affected considered terminated and do these plan provisions become immediately applicable? If an employee is working part time and also receiving unemployment benefits would they still be considered as an employee and therefore not subject to the terminated participant provisions? If an employee is working less hours than usual and does not have enough compensation to pay their loan payments after living expenses are they able to renegotiate their payments even without that provision in the loan policy? Do you know if the IRS/Regulatory bodies are considering any guidance or legislation about this? If so, do you think it will be similar to the disaster relief provisions passed previously? There are a number of additional issues that are bound to arise, i.e., break in service, continuous employment, loan offsets, automatic rollovers, etc. Any suggestions as to where to look for guidance?    

Question:
I'm sure you are getting flooded with questions with everything going on. We have a handful of restaurant / bar clients who are trying to navigate everything and are looking for a definition of termination of employment. Does ASC have one?

Question:
We are having some clients who are furloughing employees and others who are calling it a layoff, though all may be hired back. We are not sure how to handle loans or distributions in this type of scenario. Do you have any advice? Does either, or both, of the above result in a separation of service? Are they then eligible for a distribution? Does that mean in both cases that the loan becomes due and payable, as most of our documents do not allow for repayments after termination?

Question:
A few Loan Policy questions: 1. What is the definition of "Leave of Absence" regarding loan payment suspensions? Would someone being temporarily laid off count? 2. Under Section B1.10 of the Loan Policy, would a partial payment be counted as making "any scheduled repayment..." to avoid default, or would it have to be the entire payment? 3. Can a Participant voluntarily stop loan repayments (ask HR to stop loan payment withholdings from their paycheck)? 
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.
 
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CARES Act (Revised 4/1/2020) 

Question:

How does the recently enacted CARES Act affect retirement plans?  Will we need to amend our plans for the changes in the law?
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.
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Safe Harbor Contribution Suspensions (3/26/2020)

Question: 

I have a QACA Safe Harbor plan that wants to potentially suspend its match. The employer will have to provide a 30-day notice to its employees. During this period, the employer will most likely amend its plan and switch to a discretionary match. Would they have to wait until January 1, 2021 to go back to a QACA Safe Harbor type plan?
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.
 
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Safe Harbor Contribution Suspensions  - Participant Notices (3/26/2020)

Question: 

We are doing a mid-year amendment to suspend the safe harbor match. Is there a suspension notice available for us to use?
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. 
 
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Hardship Distributions (3/26/2020)

Question:  

I am sure you have been flooded with questions at this time regarding allowing in-service distributions and such. I have a couple of questions as to safe harbor and non-safe harbor hardships. 1) During this time of National Emergency due to COVID-19, since this not a "Federal Disaster" which would allow for safe harbor hardships due to loss of work, do you know if there is something in the works to allow for such in this state of emergency? 2) We have many clients with participants looking to take in-service distributions for which they may not fit the mold of the available in-service distribution options. a. As such, can we use the "non-safe harbor hardship" as an option to allow in-service distributions due to financial hardship related to the coronavirus? b. Can the reason simply state, “Due to financial hardship related to the Coronavirus or due to financial hardship related to a National Emergency”?
 
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. 
 
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Interim Valuations (3/26/2020)

Question:
We have a calendar plan year pooled plan with annual valuations. A couple of former HCE's are requesting a distribution. Sec. 10.02 and 12.08 of the BPD allow interim valuations. With the recent market downturn and since these HCE's represent over 30% of the plan assets, would you agree that language allows an interim valuation before any distributions are processed?

Question:
In light of the recent market, I am asking about some options for paying out participants (who have a distributable event) from a plan last valued 12/31/2019. If the Trustee doesn't want us to perform an interim valuation which is your suggestion? Can they pay out only a percent of any distributions requested and pay out the remainder after the 2020 year end? If so, is that a separate written policy from the plan document or is there somewhere in the plan document to indicate this?

Question:
I was wondering what you are suggesting about the following: The market has already dropped and there are participants who might be entitled to a distribution. However, unless an interim valuation or other step is taken, they would most likely get a distribution based on 12/31/19. This would not be fair and would leave the remaining participants essentially footing the bill. Does our ASC defined contribution or cash balance plan volume submitter have a technique to deal with this. For example, should our employers adopt a written action authorizing a resolution about suspending distributions, interim valuation or something else? Should our employers notify the participants in some way about whatever it they decide to implement? Any guidance or templates would be much appreciated.

ASC Response: 
Great questions, especially at this time. Certainly, the plan allows for interim valuations under the sections you cite. The correct course of action for the plan is a fiduciary decision and depends on several factors. These factors should be weighed by the plan fiduciaries to determine whether an interim valuation is the prudent decision given the facts of the situation. In any event, the decision cannot favor highly compensated employees and the fiduciaries must act solely in the interest of all plan participants. The fiduciaries, including the trustee, should carefully document their decision-making process.

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Plan Termination (3/26/2020)

Question:
 
I have a DB plan whose Plan Year runs 6/1-5/31. They are terminating effective 5/31/2020. The 2019 Plan termination amendment indicates it relates to the 2019 Plan Year; however, I thought there were changes in the SECURE Act and other laws that are reflected in the 2020 plan amendment that are effective 1/1/2020 (not related to Plan Years). Please let me know which amendment we should use. Please also advise with respect to the DC plans.     
 
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.
 
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Delay in Processing Distribution Request (3/26/2020)

Question:
 
A client that is using our 401(k) prototype wants to know how much management exposure the employer has with regard to the volatile market.  A participant makes a request for a disbursement going through the appropriate process.  Paperwork falls through the cracks and by the time the request is processed, the participant's account has lost half of its value due to market conditions.  Does the delay in processing the withdrawal on a timely manner create any exposure for the employer?    
 
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. 
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Rollovers (3/26/2020)

Question:
 
If a client freezes its 401(k) plan, does the document still allow participants to roll money in from a prior employer etc.?     
 
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.
 
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Defined Benefit Plans - Funding Relief (Rev 3/30/2020)

Question:

Is there funding relief available for DB plans?
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. 
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Defined Benefit Plans - AFTAP (Rev 3/30/2020)

Question:
With assets being significantly impacted, can sponsors avoid 2020 AFTAP certifications (that may trigger IRC 436 benefit restrictions) and instead rely on 2019 AFTAP certifications (where no IRC 436 restrictions were triggered)?
 
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. 
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Defined Benefit Plans - Lump-Sum Distributions (3/27/2020)

Question:
Will my DB plan still be permitted to pay lump-sum distributions?
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.
 
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Defined Benefit Plans - PBGC (Rev 4/13/2020)

Question:

Will my PBGC Premium payment deadline be extended?
 
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.
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Defined Benefit Plans - Operations (3/27/2020)

Question:

Should DB plan administration operations change?
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.
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DC/401(k) Compliance - 402(g) (3/29/2020)

Question:

For the calendar year 2019, the deadline for distributing amounts in excess of the 402(g) limit is April 15th. Will this be extended?
 
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.)
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DC/401(k) Compliance - ADP/ACP Corrections (3/29/2020)

Question:

For Jan 31 plan year ends, the deadline to make distributions for failed ADP/ACP tests without a tax penalty will be April 15th.  Will this deadline be extended?
 
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.)
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Government Forms - 5500 Due Date (Rev 4/13/2020)

Question:

Will my plan's Form 5500 deadline be extended?
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.)