To help with the wide-ranging economic impacts of the Coronavirus, Congress has passed the Coronavirus, Aid, Relief and Economic Security Act, commonly called the CARES Act. Not only does this provide nearly $2 Trillion in economic stimulus, this act also includes new rules that allow plan participants who have been impacted by the Coronavirus more flexibility to use their 401(k) to help them deal with financial hardships.
While we do not typically advocate for people to use their retirement savings to pay for daily expenses, we also understand that there is nothing “typical” about the current moment and strongly support the new options that plan participants now have available to them.
What are the new options? Who is eligible? What do you, as a plan sponsor, need to do to enable this relief for your participants? Let’s take a look at each of these questions so that you know how you can provide this much needed help to your team.
Who is eligible for the new options?
The new provisions apply to plan participants who:
- Have been diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention, or whose spouse or dependent has been diagnosed
- Have experienced 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.
What are the new options?
The CARES Act gives plan participants two new ways that they can use their 401(k) to deal with the impacts of the Coronavirus: a new distribution option and more flexibility with loans from the plan.
Eligible participants can take a distribution by the end of year of up to $100,000, or their full retirement plan balance, whichever is less.
The new rules waive the 10% penalty on early withdrawals
Participants will incur taxes, but taxes will be spread across three years
Participants can redeposit the funds back into the plan (or a related retirement account) over the next three years and in doing so avoid paying taxes or receive a tax refund for the taxes already paid.
- New Loans
Doubles the current retirement plan loan limits to the lesser of $100,000 or 100% of the participant’s vested account balance in the plan.
Defers payments for the first year.
Must take the loan within the next 180 days
- Existing loans for impacted participants
Individuals who already have a loan outstanding may delay loan payments until January 2021
Interest will continue to accrue
- Required Minimum Distribution Holiday
Under the new rules, a plan sponsor may declare an RMD holiday for 2020. This would let older participants not take a distribution for this year only, when the markets are lower, unless they wished to.
What do plan sponsors need to do?
If you think these provisions would be helpful to your team, then you may need to take action to make this available. You’ll need to amend the plan, and facilitate the distributions.
- Contact your plan recordkeeper/TPA
The new rules have just been enacted and many recordkeepers are still figuring out exactly how they will process the distributions and loans. You should contact your recordkeeper/TPA to find out when and how your participants will be able to take advantage of the new plan options.
- Amend the Plan:
If your plan already allows for loans and hardship distributions, then there is nothing that you need to do now. You will eventually need to work with your recordkeeper/TPA on a plan amendment, but for most plans this will be handled with the next required plan restatement. Your TPA can confirm the timing and process of this, but your plan participants will be able to begin taking advantage of the distributions now, in accordance with your recordkeeper/TPA rules
If you do not currently allow loans or hardship distributions, then you will need to amend your plan before the last day of the first plan year beginning on or after Jan. 1, 2020, or later, as prescribed by the Treasury Secretary. You should start the amendment process, but you don’t have to wait for that to be completed for your employees to begin taking advantage of this feature. To amend your plan, you should contact your recordkeeper or TPA.
- Notify your employees
Just because the new rules are in effect doesn’t mean that your plan participants are going to know that these options exist. We’ve all seen how many COVID-19 communications we’ve received, and the new plan options were part of a broader stimulus package that grabbed all the attention. It’s likely that your plan’s 401(k) provider will send you and your participants a notice, but we strongly recommend that you reach out to your participants and help them understand their options and which options make the most sense for them. Participants are likely to have questions about the options and should be educated on the impact of taking a loan or a distribution on their retirement savings.
- Support self-certification
As with other loans and distributions, the plan administrator typically must approve the request before the recordkeeper will issue the check. The new rules allow for the participant to “self certify” that they have met the requirements. This means that you may not need to collect a copy of their COVID-19 test results, for example, but it would be prudent to document their attestation of how they meet the eligibility requirements. Having a process that you follow and document will make sure that even though the participant has “self certified” their eligibility, you ensure that you are fulfilling your requirements as the plan administrator.
Need help? ForUsAll is offering a webinar for plan sponsors that will:
- Help you understand eligibility requirements and options
- Provide you with a framework to help participants navigate their choices
- Help you understand your role and responsibilities as a plan sponsor