In addition to the law and IRS guidance discussed above, sponsors of defined contribution retirement plans may wish to consider the impact of COVID-19 on their plans with respect to the following:
- Reducing or Suspending Employer Contributions: If a plan provides for discretionary employer contributions, although no plan amendment is necessary to reduce or suspend those contributions, it might be advisable to communicate the change to participants if those contributions have recently been made. If a non-safe-harbor plan provides for mandatory employer contributions, an amendment and a communication to participants is required in order to reduce or suspend those contributions. However, those mandatory contributions generally must be made for the portion of the plan year before the amendment’s effective date. If the plan is a safe harbor plan, the 2020 safe harbor notice hopefully included language stating that safe harbor contributions could be reduced or suspended for 2020. (In that case, a plan amendment and a time-sensitive communication to employees are required during 2020, along with applicable nondiscrimination testing that would not otherwise apply for 2020.) Absent that language in the 2020 safe harbor notice, safe harbor contributions can be reduced or suspended for 2020 only if the employer is operating at an “economic loss.” Applicable law does not define such term for this purpose, so plan sponsors should consult with legal counsel if they have questions in this regard.
- Partial Plan Termination: Many organizations are laying off employees as a result of COVID-19’s significant adverse effects on the U.S. economy. Employers in this situation should obtain a legal opinion as to whether the plan is experiencing a partial plan termination as a result of the layoffs. As a general rule under IRS guidance, when 20% or more of a plan’s participants are terminated from employment, there is a presumption that a partial plan termination has occurred. The effect of a partial plan termination is that all affected participants must be fully vested in their plan account – even participants who left the plan sponsor voluntarily during the period at issue. (The IRS’s rationale for vesting even voluntary terminations is apparently that those individuals might have left solely because of their concern about the plan sponsor’s financial situation.) Note that there are several nuances to consider with this issue, but those are beyond this article’s scope.
- Hardship Withdrawals: Many plans that permit hardship withdrawals follow IRS safe harbor rules, which limit these withdrawals to specified categories of financial hardships. One safe harbor involves a participant being affected by a “disaster” declared by the Federal Emergency Management Agency (“FEMA”). FEMA recently declared several states to be experiencing such a “disaster” because of COVID-19. Even in those states, however, participants will likely want to consider taking a COVID-19 distribution (if their employer’s plan is amended accordingly, as explained in the first article above) rather than a hardship distribution. That is because a COVID-19 distribution offers tax advantages that a hardship withdrawal does not.
- Participant Loans: Employers should review their plan document and loan policy regarding loan repayments during leaves of absence (paid and unpaid) and after employment termination. Employers may also wish to consider amending their plan document and loan policy to allow an additional loan, at least until this COVID-19 monster is under control.
- Compensation: Plan sponsors should consider whether any new pay types that result from COVID-19 are included in or excluded from plan “Compensation” when calculating participants’ contributions and employer contributions. For example, the IRS recently posted on its website numerous Frequently Asked Questions about the Families First Coronavirus Response Act (the “FFCRA”). One part of that new webpage states that qualified sick leave wages and qualified family leave wages paid to employees under the FFCRA are included in recipients’ gross income. (Note that only employers with fewer than 500 employees are subject to the FFCRA.) Under many retirement plans, those amounts would thus constitute plan “Compensation.”
- Remittance of Participants’ Deferrals and Loan Repayments: Given that many organizations’ Human Resources and Payroll staff will work at home for an extended period, employers should ensure that all relevant personnel are clear on the process of remitting participants’ deferrals and loan repayments to their plan in a timely manner. Small plans (generally, those with fewer than 100 participants) must remit those amounts to the plan within 7 business days after they are withheld from participants’ pay. Large plans must remit those amounts to the plan as soon as possible after they are withheld from participants’ pay. Also note that employers cannot use those amounts to fund business operations (e.g., payroll), no matter how dire the employers’ financial situation may be.
- Employment Terminations: If a participant is not eligible for an in-service distribution, he or she must incur a bona fide severance from employment in order to receive a distribution from his or her plan account. Per the IRS, a bona fide severance exists when the individual is no longer working for the employer in any capacity. Also per the IRS, whether a bona fide severance has occurred depends on each situation’s facts and circumstances. For example, an employee in the following situation does not have a bona fide severance that would allow the employee to receive a plan distribution: the employee purports to terminate employment in order to receive a plan distribution, but the employee has an explicit understanding with the employer that he or she is not actually terminating. If a “termination” distribution occurs in that situation, the distribution is improper and the plan could be disqualified.
- Plan Investment Lineup: As a result of the recent significant drop in the stock market, fiduciaries should review their plan investments and investment policy statement. As with any fiduciary decision, a decision about whether to alter the plan’s investment lineup in light of COVID-19 should be documented and retained in the plan’s files. In this connection, fiduciaries may wish to consult with their plan’s investment advisor before the next regularly-scheduled meeting. This may involve a re-consideration of pending investment lineup changes that were decided upon before the COVID-19 outbreak.