Slightly more than a week has passed since the passage of the CARES (Coronavirus Aid, Relief, and Economic Security) Act. It was signed on Friday, March 27th. It feels like a month.
As a result of its passage, well-meaning providers, consultants, and advisors (ACG included) have produced countless emails, webinars, and conference calls to try to help plan sponsors make informed decisions that affect their participants. The flurry of activity has left many plan sponsors overwhelmed during a time when many are simply trying to figure out how they’re going to stay in business.
Not surprisingly, there are many questions being asked. As a result of a conference call (no joke) the following 5 questions have been reported by the Retirement Learning Center as their most frequently asked.
Question 1. Can a non-safe harbor plan be amended to remove employer contributions?
Answer. Yes, however, always consult your plan document.
If your plan document is written to allow discretionary contributions – either matching or profit sharing – you can change your contribution at any time with no plan amendment That having been said, it would be wise to provide some form of written communication at least 30 days before a change is made as a courtesy. Beware, your discrimination tests will be affected.
If your plan document has a stated contribution formula, a plan amendment will need to be made and contributions must continue until the effective date of the amendment. Also, if you make your contributions at the end of the year, you’re not off the hook. You will need to make your contributions for the portion of the year your contribution was effective. No advance written 30-day notice is required but a Summary of Material Modifications or SPD will need to be written or updated. Finally, your discrimination tests will be affected.
Question 2. Can a safe harbor 401(k) plan be amended to suspend or eliminate the safe harbor contribution? Again, always consult with ERISA counsel, first.
Answer. Yes, you will have to work with your plan administrator because there are several steps to take. A general overview of the steps are as follows:
1. The employer must be operating at an economic loss or the safe harbor notice provided before the start of the plan year includes a statement that you may reduce or suspend contributions mid-year.
2. A plan amendment must be made suspending the safe harbor contribution.
3. A supplemental notice needs to be distributed to eligible employees at least 30 days before the effective date of the reduction or suspension of contributions.
4. The safe harbor matching contribution for deferrals must be made until the amendment is effective – at least 30 days later.
5. The plan is tested for the full plan year in which the reduction or suspension occurs using the current year testing method.
6. Changing back to a safe harbor plan must start at the beginning of a plan year.
Question 3. When does a partial plan termination happen and what are the ramifications?
Answer. The IRS defines a partial plan termination as a situation in which more than 20 percent of the total plan participants are laid off in a particular year. The determination of a partial plan termination is based on “facts-and-circumstances” and can be due to one event such as a plant closing or can occur over time due to an economic downturn, industry event or a similar general occurrence. The IRS does not consider routine turnover during a year (especially in those industries with typically high turnover) to be partial plan terminations. Again, your plan administrator will be able to provide specific guidance.
A partial plan termination requires immediate 100 percent vesting for affected employees on the termination date regardless of the time remaining to become fully vested in employer contributions.
Please see https://www.irs.gov/pub/irs-pdf/i5300.pdf for more information.
Question 4. Can we change the plan’s funding frequency from per payroll to year end?
Answer. Yes. The frequency can be changed for either standard or safe harbor 401(k) plans. If your plan is a standard 401(k) plan your plan document needs to be reviewed because the funding, or contribution, frequency may be stated in the plan document, which will require an amendment to make a change. If your plan is a safe harbor plan, a change from per payroll to end of year may also be made but advance communications to participants is generally required if the contribution frequency is disclosed in your safe harbor notice. Please contact your plan’s administrator for assistance.
Question 5. Are hardship distributions as a result of COVID-19 exempt from the 10 percent distribution penalty tax?
Answer. Yes. Hardship distributions are exempt from the 10 percent early withdrawal penalty. Hardship distributions, however, still require documentation which align with a qualifying event stated in your plan document.
A Coronavirus Related Distribution (CRD), if allowed by the plan, does not require documentation from the participant and are not hardship distributions. A CRD is also exempt from the 10 percent early withdrawal penalty and, if allowed by the plan, certain participants may withdraw, penalty free, up to $100,000 between January 1, 2020 and December 31, 2020. The participant has three years from the day after the distribution was received to repay the amount into a qualified retirement plan (or any other plan or IRA that can accept rollovers). The distribution will be taxable if it’s not repaid, but it can be repaid over a three-year period, unless otherwise elected.
It is important to know that this information is meant to provide general guidance to some of this week’s most frequently asked questions. Specific advice related to these matters must come for your plan administrator or ERISA counsel. ACG is neither a law firm nor a plan administrator.