How Could COVID-19 Impact My Retirement Plan?

As we experience an unprecedented time of change and uncertainty, many are processing and evaluating the impacts of COVID-19 on their businesses and cash flows. For business leaders, there is added pressure in knowing the impacts that this time of uncertainty will have on your employees.

The Aldrich Retirement Solutions team is here to help you navigate through this challenging time. As we continue to evaluate the current landscape, we have assembled a list of questions that focus on retirement plan contribution options and timing and how employees can access their retirement plan savings. Of course, every situation is unique so please do not hesitate to contact us so that we may assist you with your specific retirement plan questions and needs.

For more on how the CARES Act will impact retirement plans, read our explanation of relief provided by the new legislation.

The COVID-19 pandemic and our nation’s response to it are still rapidly evolving. We will keep our COVID-19 Resource Center up-to-date with all regulatory developments or changes.  Please be sure to visit the site frequently so that you are informed of the changes in the coming weeks.

• When is the deadline to deposit our employer contribution?
• We have a 401(k) Plan that provides employer contributions. What are our options when it comes to adjusting or reducing these contributions?
• Do we need to notify our employees if we adjust the employer contributions in a 401(k) plan?
• What is the deadline for transmitting 401(k) contributions and participant loan payments?
• Can my employees stop their 401(k) deferrals?
• We also have a pension plan (Cash Balance or Defined Benefit). What are our options when it comes to reducing the plan benefits to lower our contribution cost?
• We are concerned about the cost to fund our pension plan. Do we have flexibility on how much we fund the plan this year?
• Some of our employees may be placed on furlough. During this time, are they considered terminated employees and eligible to request distribution of their retirement account(s)?
• Do employee layoffs impact our retirement plan and will these employees still receive contributions in the year they terminated employment?
• Can the retirement plan pay plan investment and administration expenses?
• If I need to close my business, what happens with my retirement plan?
• Is Congress considering legislation to assist employees or employers during this pandemic that may impact our retirement plan?

When is the deadline to deposit our employer contribution?

The deadline to deposit employer contributions depends on the purpose, contribution type and your business entity. Below are some of the most common deadlines.

Tax Deduction: the contribution must be deposited no later than the due date of your company’s tax return deadline (including extensions).

Compliance: the contribution must be deposited no later than 30 days after the due date of your company’s tax return deadline (including extensions). However, certain safe harbor contributions can be made as late as the last day of the plan year following the plan year in which they accrued.

Minimum Funding Requirement:  Defined Benefit and Cash Balance Plans have a minimum funding deadline of 8.5 months following the close of the year (e.g. September 15th for calendar year plans). This only applies to the minimum required contribution and not the total contribution.

Not-For-Profit Organizations: the contribution must be deposited no later than 9.5 months following the close of the year (e.g. October 15th for calendar year plans).

We have a 401(k) Plan that provides employer contributions. What are our options when it comes to adjusting or reducing these contributions?

There may be many options available to you, but certain factors must be considered to be sure. These can include the contribution type, your plan document provisions, non-discrimination testing, minimum allocation requirements, timing and, of course, your contribution goals.

Below are additional details about these factors. However, since these are specific to your plan, please contact us if you are interested in reviewing your plan contribution options.

Matching Contributions: There are three types of match contributions (i.e. discretionary, fixed and safe harbor).

A discretionary match is not required to be provided and usually has flexibility on the match rate. The plan may require that an employee work a minimum number of hours during the year or be employed at year end. Or, there may be no requirements at all.

A fixed match provides for a specific match rate and is provided to plan participants if they meet the plan’s allocation requirements. These requirements may include a minimum number of hours worked or employment at year end. Or, there may be no requirements at all.

The plan can be amended to change or remove the fixed matching contribution. However, matching contributions that have already been accrued by plan participants prior to the amendment must be provided to them.

A safe harbor match provides a specific match rate, has no allocation requirements and is 100% vested. It may be removed via amendment but only under certain circumstances (e.g. substantial business hardship) if it is to be effective mid-year. A mid-year amendment would also require a notice to participants in advance of the amendment.  Finally, any matching contributions that have already been accrued by plan participants prior to the amendment must be provided to them.

Note:  A safe harbor match is typically provided to waive non-discrimination testing on employee deferrals and matching contributions. If the plan is amended to remove it, the testing will apply and may result in taxable contribution refunds to highly paid employees and owners.

Non-Elective Contributions:  There are three types of non-elective contributions (safe harbor, discretionary profit sharing and fixed profit sharing).

A safe harbor contribution is equal to 3% of a participant’s plan compensation, has no allocation requirements and is 100% vested. Similar to the safe harbor match, it is typically provided to waive non-discrimination testing on employee deferrals and matching contributions. It also follows the same rules in regard to amending to remove it mid-year. The SECURE Act has now made it possible to add the 3% safe harbor contribution later in the year, and even retroactively after year end (though the requirement becomes a 4% safe harbor contribution if the amendment is signed fewer than 31 days before the end of the year) so a plan could be amended to remove the 3% safe harbor contribution currently, and then amended later to add it back for the year.

A discretionary profit-sharing contribution is not required to be provided and usually has flexibility in regard to the contribution amount. It also specifies how it will be allocated. This can be based on named groups, but many plans are flexible enough to permit specific allocations to each individual. While it can be very flexible other factors may require that it be provided.  See Minimum Required Contributions below.

A fixed profit-sharing contribution is similar to a fixed match in that there is a set contribution formula that will be provided to participants if they meet the plan’s allocation requirements. The plan can be amended to remove it or to change its allocation formula. However, mid-year amendments may be restricted if participants have already met the allocation requirements for the plan year.

Minimum Required Contributions: Certain factors may require that even discretionary contributions be provided to plan participants at a minimum level. Minimum required contributions typically range from 3% to 7.5% of pay based on the plan’s “Top Heavy” status, non-discrimination testing and if you also sponsor a Defined Benefit or Cash Balance Plan.

Do we need to notify our employees if we adjust the employer contributions in a 401(k) plan?

A notice is not required when it comes to discretionary contributions. However, you may choose to notify employees of the change if it has already been communicated to them. This may be particularly true for a discretionary match if employees are basing their deferral elections on an expected match rate.

A notice is required if the plan is amended to remove a safe harbor or fixed contribution. This may include a specific notice for mid-year removal of the safe harbor contribution or a summary of material modification to reflect changes to your summary plan description.

What is the deadline for transmitting 401(k) contributions and participant loan payments?

Employee deferrals to a 401(k) or 403(b) plan must be must be deposited by the earlier of:

• The dates that the contributions can be reasonably segregated from the company’s general assets, or
• The 15^th business day of the month following the month in which the payday occurs

The “15^th business day of the following month” is a “no later than” date, and not a rule with which a plan sponsor should take comfort. A DOL investigator could take the position that the plan sponsor could have reasonably segregated the contributions well before then and would therefore conclude that the deposits were late.

There are practical guidelines for deposit deadlines for plan sponsors depending upon whether they are small employers (filing a Form 5500-S/F) or large employers (filing a Form 5500 with an annual audit):

• Small employers have a seven-business day deadline to make their deposit to be considered timely.
• Large employers must make their contributions as soon as administratively possible. In addition, if the DOL investigates a large employer they could look at the shortest number of days that the employer was able to make the deposit of 401(k) contributions, conclude that that is as soon as administratively possible and use that as the standard for all other deposits. For example, if the employer managed to make their deposit within one day of a pay date, all future deposits could be held to this timing to determine if the contributions were deposited timely or late. A practical approach for large plan sponsors would be to avoid depositing contributions so early that it would be administratively difficult to replicate in the future.

Late 401(k) contribution deposits are disclosed on Form 5500. As the DOL has made this a priority, and the disclosure can invite DOL scrutiny, it is important to correct late payroll deposits once they are discovered.

Can my employees stop their 401(k) deferrals?

Yes, employees may stop their 401(k) contributions at any time. They can start again depending upon your policy. Some plans allow employees to start up again at any time, other plans provide for specific dates when this is allowed.

We also have a pension plan (Cash Balance or Defined Benefit). What are our options when it comes to reducing the plan benefits to lower our contribution cost?

The benefits (or contributions) that accrue in a pension plan can be reduced via plan amendment. Only future benefits can be reduced. Benefits that have already accrued must be protected.

Benefit reduction amendments can be effective in the current plan year but only if it is executed prior to participants accruing benefits for the year. This often occurs when participants have been credited with 1,000 hours of service. A notice must also go out to participants at least 15 days (45 days for plans with more than 100 participants) prior to the effective date of the amendment.

In times of economic uncertainty or hardship, plan sponsors may choose to freeze a plan (i.e. reduce future benefit accruals to zero) and then later reinstate them once the period is over.

Please contact us as soon as possible if you would like to discuss reducing benefits in your pension plan.

We are concerned about the cost to fund our pension plan. Do we have flexibility on how much we fund the plan this year?

Yes. Each year a pension plan is permitted a funding range. There is a minimum required contribution and a maximum deductible contribution. Neither is typically recommended as they could result in a plan that is either underfunded or overfunded. Both of which present their own challenges to the plan. However, this range is available should you need it.

Please contact us if you would like to discuss your plan’s funding options and how adjusting it may impact your plan.

Some of our employees may be placed on furlough. During this time, are they considered terminated employees and eligible to request distribution of their retirement account(s)?

No, a furlough is not considered a termination of employment. However, they may still be able to access some, or all of their account based on the plan’s provisions and policies. This can include plan loans, in-service withdrawals and hardship withdrawals.

Note that withdrawals paid directly to participants will be subject to normal income taxes and those under age 59.5 may be subject to a 10% early withdrawal penalty.

Please contact us if you would like to discuss your plan’s loan and withdrawal options including amending them if needed.

Do employee layoffs impact our retirement plan and will these employees still receive contributions in the year they terminated employment?

If you have a substantial number of employees terminate employment, this may be considered a partial plan termination and will require the affected employees be 100% vested in their accounts.

Employees may receive contribution allocations in the year they terminate employment according to the plan provisions, your contribution goals and other factors (e.g. minimum required contributions and non-discrimination testing).

Can the retirement plan pay plan investment and administration expenses?

Yes, the plan can pay expenses for investment advisory and administrative tasks related to the necessary operation of the plan. When a 401(k) or profit sharing plan pays for plan expenses, this results in a reduced investment return for the plan participants. In addition, a 401(k) or profit sharing plan can charge participants for the expense of processing a loan, benefit payment or Qualified Domestic Relations Order.  When a Defined Benefit or Cash Balance plan pays for plan expenses this will impact the plan’s funding status and the minimum required contribution. Please note that a Defined Benefit or Cash Balance plan may not charge their participants for loans, benefit payments or Qualified Domestic Relations Orders.

The plan cannot pay what are known as “settlor” expenses, which are expenses for services that benefit the employer. These expenses would include expenses related to changing the design of the plan to reduce costs, improve benefits for owners, plan termination, etc.

Please let us know if you would like to learn more about how the retirement plan can pay expenses.

If I need to close my business, what happens with my retirement plan?

If you must close your business, you should terminate your retirement plan. This is done by formally adopting a resolution to end the plan as well as any IRS required amendments. Once the plan is terminated all benefits are paid from the plan and a final Form 5500 is filed showing a zero balance in the trust.

If you have a pension plan (Defined Benefit or Cash Balance) you may need to submit the plan termination to the Pension Benefit Guaranty Corporation. You also have the option to submit your plan termination to the Internal Revenue Service for approval. This can be helpful if the plan is audited in the future, but it adds additional cost and time to the process.

Please let us know if you would like to discuss these options in detail.

Is Congress considering legislation to assist employees or employers during this pandemic that may impact our retirement plan?

Yes. The Coronavirus, Aid, Relief, and Economic Security (CARES) Act, was just introduced in the Senate. If passed it would:

• Waive the 10% early withdrawal penalty for distributions up to $100,000 to individuals impacted by COVID-19 and allow them to pay tax on the income ratably over a three-year period and/or pay it back to the plan tax-free over the same period.
• Increase loan limits to the lesser of $100,000 or 100% of the participant’s vested account balance. It would also permit participants with an outstanding loan to delay loan repayments for up to one year.

As always, your Aldrich Retirement Solutions team is here to provide support for you however we can during these rapidly changing times. For further information, please contact your advisor. For more employer resources to help you navigate the developing impact of coronavirus on your business, visit our COVID-19 Resource Center.

This article is a broad overview of options available to plan sponsors in response to COVID-19 and is provided as a service to our clients and friends. It should not be relied upon for tax or legal advice.