On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act or the “CARES Act”, into law. We discussed the employee benefit plan provisions included in the CARES Act in our Quick Study published last week, which can be found here. For sponsors of defined contribution plans, these provisions include: coronavirus-related distributions, which are a new form of distribution, relaxed loan provisions, and suspension of 2020 required minimum distributions (a brief summary of these provisions is provided in the second part of this blog post).
The CARES Act changes are significant, particularly the new coronavirus-related distributions. As a result, several of the large third-party administrators are informing their clients that they will be automatically providing coronavirus-related distributions for all of their client plans unless the plan sponsor files an affirmative election to not offer this form of distribution prior to a designated response date. Based on our experience, this approach will apply to clients who sponsor individually designed plans and clients who have adopted the TPA’s prototype plans or volume submitter plans documents.
By following an “opt-out” approach to this issue, the third-party administrators are attempting to provide maximum levels of relief to plan participants, which is consistent with the goals of the CARES Act. That is a valid objective given the financial crisis created by the COVID-19 pandemic. We are concerned, however, that this approach may result in changes that are not approved by plan sponsors in a manner that complies with the terms of the underlying plan document and/or the plan sponsor’s internal governance process.
For most of our clients, the plan document (including many prototype plans and volume submitter plans) includes language which states that any amendment must be approved by the plan sponsor. And in many instances the right to approve a plan amendment is reserved to the Board of Directors or is delegated to a particular individual or plan committee (and in some instances, the delegation of authority to an individual or committee may be limited to required plan compliance amendments as opposed to optional plan design amendments). Under this opt-out approach that is currently being used by some TPAs for coronavirus-related distributions, a plan sponsor which does not file a written election will automatically change its plan terms to provide this new form of distribution (i.e., coronavirus-related distributions) that is determined under a new form of approval process (self-certification) without taking any corporate action. While a retroactive amendment will be adopted during the 2022 plan year, as permitted by the CARES Act, the distributions will have already been made.
Plan sponsors need to carefully consider the issues raised by the opt-out process during this very difficult period of time. To the extent practical, we recommend that plan sponsors which have formal delegations of amendment authority to an individual or committee take steps to obtain a written consent from that individual or committee for the non-filing of an opt-out election. Where that is not possible, we recommend that the individual or committee be consulted related the plan change and then asked to ratify this action. This approach will help ensure that plan sponsors are following their internal governance procedures when implementing a change to a plan’s terms that may result in millions of dollars being distributed to actively employed participants.
Summary of CARES Act Changes
Coronavirus-Related Distributions
The CARES Act allows qualified retirement plans to provide a special distribution option in 2020 to individuals affected by COVID-19 (“Qualified Individuals”). These distributions, which can be up to $100,000 in the aggregate, will not be subject to the 10% early withdrawal penalty or the mandatory 20% withholding. Additionally, they can be included in the participant’s taxable income over a three-year period and the participant also can be permitted to repay the distribution to the plan. A participant is a Qualified Individual if: (i) the participant, the participant’s spouse or the participant’s dependent (as defined in Code Section 152) is diagnosed with COVID-19 or (ii) the participant experiences adverse financial consequences as a result of:
- being quarantined;
- being furloughed or laid off or having work hours reduced due to COVID-19;
- being unable to work due to lack of child care due to COVID-19;
- closing or reducing of hours of a business owned or operated by the individual due to COVID-19; or
- or other factors as determined by the Secretary of the Treasury.
Relaxed Loan Provisions
For loans taken during the 180-day period beginning on the date of enactment of the CARES Act, the maximum permissible loan amount that a plan may permit a Qualified Individual (defined above) to take is increased from the lesser of $50,000 or 50% of a participant’s vested account balance to the lesser of $100,000 or 100% of the participant’s vested balance.
Additionally, all payments due on outstanding loans, including loans taken following enactment of the CARES Act, that otherwise would be due this year, are deferred for an additional year. In addition to delaying the repayment dates by one year, the repayment schedule for remaining amounts due must be adjusted appropriately.
Waiver of Required Minimum Distributions
The CARES Act temporarily waives, for the 2020 calendar year, required minimum distributions (“RMDs”) from certain defined contribution plans, including 401(k) plans, 403(b) plans and governmental 457(b) and Individual Retirement Accounts (“IRAs”). This waiver applies to both 2019 RMDs that need to be taken by April 1, 2020 (where the individual attained age 70-½ in 2019) and 2020 RMDs. The CARES Act also adds a special rollover rule, similar to the one enacted in 2009, allowing amounts subject to the RMD rules in 2020 to be rolled over to IRAs or other eligible retirement plans.
