How long do employees have to take advantage of these new provisions?
The CARES Act provisions currently expire on Sept 23, 2020 for loans and December 31, 2020 for distributions.
Does the CARES Act requirement for adverse financial consequences include pay cuts from the current employer?
Yes, adverse financial consequences generally include lost income from pay cuts, reduced hours, furloughs or layoffs.
Do employees have to provide documentation to prove that they have been impacted by COVID-19? If so, what?
While the CARES Act does not provide explicit documentation guidelines, most providers have adopted the view that employees simply need to “self-certify” that they meet the requirements.
A prudent self-certification process should:
(a) Have the employee attest to the specific reason they qualify for the distribution
(b) Document the steps the employer takes to verify what they can
For example, if an employee claims that they were sick with COVID-19, the employer does not need to demand to see the test results. Rather, the employer may rely on the employee’s attestation that they tested positive with a CDC-approved test. However, there may be some claims that, on their face, do not qualify. For example, if an employee were to self-certify that they lost their job, the employer should reasonably be expected to verify that the employee was in fact terminated. We recommend that employers develop, document and consistently apply a standard process for reviewing and approving these distributions.
What if an employee can’t get a test to prove they have COVID-19?
Currently, employees must have tested positive using a CDC-approved COVID-19 test to qualify for the new distribution benefits. However, given the challenges of receiving a COVID-19 test, we hope that subsequent guidance from the IRS may loosen these standards.
Can loss of income include the loss of a spouse's income, due to COVID-19?
No, for the purposes of qualifying for a distribution under the employee's plan, it cannot. The employee should reach out to the spouse's HR team to understand which CARES Act provisions the spouse’s employer will be supporting.
Can retirees that are still in the 401(k) plan take out a loan?
Generally, no. Most plans do not allow employees that have retired or been terminated to take out a loan.
If we require an employee to stay home due to COVID-19, are they entitled to CARES Act benefits?
If an employee suffers lost income as the result of being required to stay at home, they will qualify for the distribution benefits.
Are employees that have already been laid off or furloughed allowed to take out a loan under the CARES Act?
Employees that have been laid off are not eligible to take out a loan, but they can still take a distribution. Employees who have been furloughed are eligible to take out a loan, but we would strongly recommend they take a distribution.
What if our plan doesn't allow loans or in-service distributions? Are we required to offer loans and in-service distributions under the CARES Act?
You are not required to allow any of the new CARES Act withdrawal options. If you do want to offer these options, you may need to make one, or possibly two amendments, depending on how your current plan is set up.
First, let’s assume that a plan doesn’t currently allow loans or in-service distributions. In this case, you would need two amendments:
(a)Allow employees to take loans and in-service distributions; Allow CARES Act withdrawals (which include both new loans and distributions)
(b) If, however, a plan allows loans, but not in-service distributions, then they would only need to make one amendment to allow the CARES Act distributions.
We allow in-service withdrawals, but not loans. Can we ask employees to take withdrawals instead of loans?
Yes, you can adopt the CARES Act Provisions for distributions only.
Our plan already has a one-loan limit. Does the CARES Act allow for a second loan?
To enable employees to take a second loan, you would first need to amend your plan to allow for more than one loan, then you would need to make a second amendment to adopt the CARES Act provisions. The amendment to allow for the second loan would need to be done this year, while the CARES Act amendment needs to be done by 2022. You may be able to do both amendments together, but the document providers have not drafted the amendment for the CARES Act provisions and have gotten an extension to 2022 to get those amendments prepared and processed.
Our plan only allows hardship loans. Does this mean we have to change our plan in the next year to allow loans?
You are not required to allow any of the new CARES Act withdrawal provisions. If you want to allow for loans due to the coronavirus pandemic, under the CARES Act provisions, you will need to notify your recordkeeper that you intend to adopt the appropriate amendment and then you have until 2022 to actually amend your plan.
What if an employee already has a loan? Does the CARES Act have any provisions for the deferment of those loan payments?
If an employee already has a loan and you adopt the CARES Act provisions, they will be able to defer payments for up to a year.
If an employee already has a loan, are they eligible for a second loan under the CARES Act?
Yes, if your plan allows for two loans, but they have to deduct the value of the first loan from the $100k limit.
Can an employee defer a current loan and take out a second loan? If yes, can the employee defer both?
Yes, an employee can defer any current loans for up to a year. They can also take out additional loans under the CARES act provided that they 1) qualify for CARES Act withdrawals; and 2) stay within the plan’s loan limits.
When taking out multiple loans, the aggregate amount of the loans cannot exceed $100k or 100% of their vested balance.
If employees who are already laid off may not to take out a loan, can they take out a CARES Act distribution?
Employees that are laid off can take out a CARES Act distribution. It should be noted that while similar to hardship distributions, CARES Act distributions are actually a distinct type of distribution with different qualification reasons and different tax treatments.
If we do allow loans, are we obligated to allow the new loan amounts under the CARES Act?
No, you are not required to allow the new CARES Act loan amounts or allow CARES Act distributions.
If we allow up to two loans and an employee has already taken two, are we supposed to allow another loan under this guidance?
That depends on what you want. If you would like employees who have already hit the loan limit for the plan to access CARES Act loans, then you will need to increase your loan limit. That said, if you do not want to allow employees to take more than two loans, you do not have to allow another loan. In this case, you would adopt the CARES Act provision and any employee that has 1 or fewer loans would be able to access a CARES Act loan, while all others would need to take a CARES Act distribution.
What amendments must sponsors file to make these changes?
Sponsors need to tell their Recordkeeper/TPA that they intend to adopt the CARES Act provisions before they can allow a participant to take advantage of the CARES Act withdrawal or loan options, but the actual formal amendment to adopt the CARES Act provisions does not need to be signed until 2022.
I understand that we have a fiduciary responsibility to consider providing these CARES Act options to employees impacted by COVID-19, but don't we have that same fiduciary responsibility to inform them not take out retirement funds before retirement, or when the market is down?
Yes, if you are the fiduciary for your plan, you should absolutely counsel employees on the impact of taking a distribution when the market is down. Even if you have a third party fiduciary for your plan, it’s the right thing to do to make sure employees are aware of this. If they take money out of their 401(k) now, they could be locking in losses. Moreover, if they don’t put the money back into their 401(k), they will take an even bigger hit to their retirement. However, if their 401(k) is their last and only option, these rule changes may really help them. They just need to understand the impact of a given decision. We’ve created a CARES Act 401(k) Calculator, which you can use to help them model different scenarios and the related impact to their retirement.