Over the past three months there have been a number of updates provided to the retirement community by both the Department of Labor and the Internal Revenue Service.
On May 21, 2020, the DOL announced a final rule regarding the ability to deliver required disclosures electronically. There is a separate article in our newsletter which discusses these rules in more detail.
On June 19, 2020, the IRS Published Notice 2020-50. The Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020 was signed into law on March 27, 2020 and contains several provisions which have an impact on ESOP and 401(k) plans. This notice from the IRS provides some additional guidance regarding handling of coronavirus related distributions and loan processing.
An individual who is considered a Qualified Individual is eligible to treat many types of distributions from a qualified retirement plan as a Coronavirus Related Distribution. A Qualified Individual is defined as someone:
- Diagnosed with COVID-19 by a CDC recognized test
- Whose spouse or dependent is diagnosed with COVID-19
- Who experiences adverse financial consequences as a result of:
- Being quarantined
- Being furloughed
- Having work hours reduced
- Being unable to work due to lack of childcare
- The closing or reduction of hours of a business owner by the individual
- A reduction in pay or self employment income
- Having a job offer rescinded or a start date for a new job delayed
- This also applies if a spouse of member of your household have adverse financial consequences
An individual can certify themselves as a Qualified Individual and a plan sponsor can rely on that certification (unless they have knowledge to the contrary).
The following types of distributions from a qualified plan can be treated as a Coronavirus Related Distribution by anyone who is a Qualified Individual:
- Distribution due to termination of employment
- Distribution due to a plan termination
- Hardship Distributions
- Required Minimum Distributions
- Installment Payments
- Distribution to a beneficiary of a deceased participant
- In-Service Distributions
A plan also has the discretion before September 23, 2020 to allow loans from a qualified plan which exceed the usual loan limits for Qualified Individuals. If the plan allows for it, total loans can be processed to a limit of the lesser of $100,000 or 100% of the participant's vested account balance. A plan can also suspend required loan payments or extend the term of the loan up to one additional year.
On June 23, 2020, the IRS Published Notice 2020-51, which provides guidance regarding the 2020 suspension of Required Minimum Distributions (RMDs). The CARES Act suspended for the 2020 calendar year the requirement for retirement plans to process RMDs. There is a separate article in our newsletter which discusses the RMD waiver for 2020 in more detail, including some of the options that you as a plan sponsor have with respect to processing of RMDs in 2020.
On June 29, 2020, the IRS Published Notice 2020-52, which provides guidance regarding the requirements for a plan sponsor to execute a mid-year plan amendment to a plan which makes safe harbor contributions. Some companies make Safe Harbor Contributions to their ESOP to satisfy the non-discrimination testing rules in their 401k plan, so this guidance can also have an impact on ESOP companies that do this.
Normally if a company wanted to suspend or reduce their safe harbor contributions, they would have to follow the following guidelines:
- The company either is operating at an economic loss, or in they disclosed in their original annual safe harbor notice that they may not make safe harbor contributions
- They have to give a 30 day advance notice before stopping contributions
- They must amend their plan and cannot amend sooner than 30 days after the notice is provided
- All safe harbor contributions up to the date of amendment must be funded
- Participants must be given the option to change their deferral elections
Notice 2020-52 provides relief for safe harbor suspensions made up to August 31, 2020.
- The normal qualification requirements to operate at an economic loss or to have disclosed that the company may not make safe harbor contributions are waived.
- The requirement to provide a 30 day advance notice is also waived, but only for companies that make a safe harbor contribution in the form of a non-elective contribution (3% of compensation) between March 13, 2020 and August 31, 2020. An updated notice must still be provided by no later than August 31, 2020.