COVID-19 Defined Contribution Plan Funding Relief Legislative Proposal
The American Retirement Association strongly supports federal legislation to provide immediate defined contribution or 401(k) plan funding relief. Small businesses face significant cash flow problems due to the COVID-19 pandemic and are considering 401(k) plan termination to decrease payroll costs. A recent American Retirement Association analysis determined that over 200,000 small business 401(k) plans are at risk for termination.
The American Retirement Association proposes that employers that have suffered a business hardship, as defined under Section 412(c) of the Internal Revenue Code, be allowed the following relief:
2020 Plan Year Funding Relief
Retirement plans are able to suspend employer contributions after satisfying some conditions. The proposal permits a safe harbor plan design to maintain their safe harbor status for the remainder of the plan year. Plans that are not deemed “safe harbor” plans remain subject to top heavy testing, but ADP/ACP testing is waived for 2020.
2020 Plan Year Funding Relief Guardrails
The proposal has three important guardrails for key employees, as defined under Section 416 of the Internal Revenue Code, to prevent abuse of the relief.
- Key employees are prohibited from making their own contributions to the plan during the relief period.
- Key employees are prohibited from receiving employer contributions to non-qualified retirement plans during the relief period.
- Key employees must make contributions to the plan on a ratable basis, in other words, key employees must not have front-loaded their own contributions to the plan at the beginning of the year.
2019 Plan Year Funding Holiday
The proposal permits 401(k) plans with 500 or fewer participants to delay for one year any employer contributions that have not yet been made to satisfy their 2019 obligations. Safe harbor plans retain their status for the 2019 plan year.
Partial Plan Termination Rule Relief
The proposal changes the partial plan termination rules to incentivize employers to rehire employees within one year of the declaration of the COVID-19 public health emergency. If an employer rehires at least 80% of the active participants in the plan by March 13, 2021, then the plan would not be subject to the normal partial plan termination rules.
COVID-19 Employee Benefits Regulatory Guidance
Department of Treasury and Internal Revenue Service Guidance
On April 9, 2020, the Department of Treasury and Internal Revenue Service issued Notice 2020-23 that that amplified prior notices extending key tax filing deadlines falling on or after April 1, 2020, for individuals and businesses to July 15, 2020. In short, the Notice captures 44 time sensitive items for employee benefits and other business tax filings listed in Rev. Proc. 2018-58, which includes any Form 5500 filing deadlines that happen to occur during that period. However, the extension does not apply to the Form 5500 deadline for calendar year plans, which must file by July 31, 2020, unless a Form 5558 is physically mailed to the Internal Revenue Service to ask for an extension to October 15, 2020.
Department of Labor Guidance
On April 20, 2020, the Department of Labor’s Employee Benefits Security Administration (EBSA) issued Disaster Relief Notice 2020-01 to provide deadline relief and other guidance under Title I of the Employee Retirement Income Security Act (ERISA) to help employee benefit plans, plan participants and beneficiaries, employers and other plan sponsors, plan fiduciaries, and other service providers impacted by the COVID-19 pandemic.
The Notice extends the time for plan officials to furnish benefit statements, annual funding notices, and other notices and disclosures required by ERISA so long as they make a good faith effort to furnish the documents as soon as administratively practicable. The Notice explains that good faith includes the use of electronic alternative means of communicating with plan participants and beneficiaries who the plan fiduciary reasonably believes have effective access to electronic means of communication.
Department of Labor’s New Electronic Disclosure Safe Harbor for Retirement Plans
On May 21, 2020, the Department of Labor’s Employee Benefits Security Administration (EBSA) announced the publication of a Final Rule to allow employers to modernize the way they deliver retirement plan information to participants and beneficiaries. The rule creates an additional optional safe harbor that allows employers to default participants and beneficiaries into receiving their retirement plan information electronically, while preserving the rights of those who prefer to receive information by mail. The Department of Labor estimates the Final Rule will reduce the cost of administering retirement plans by $3.2 billion over the next 10 years, savings that will largely result in increased retirement account balances for plan participants.
Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act
On May 15, 2020, the House of Representatives passed the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act (H.R. 6800). The bill provides nearly $1 trillion to state and local governments, adds funding for Coronavirus testing, provides additional direct payments of up to $1,200 per individual, extends unemployment benefits and housing and food assistance, and requires employers to develop and implement infectious disease exposure control plans.
Division D of the HEROES Act contains the Emergency Pension Plan Relief Act of 2020 (EPPRA), which includes provisions supported by the American Retirement Association. Below is a quick description of those provisions.
Waiver of Required Minimum Distributions for 2019 (Section 40301)
This section allows taxpayers with individual account retirement plans and/or IRAs to waive any required minimum distributions from those accounts for the 2019 calendar year.
Waiver of 60-Day and Once-Per-Year Limitation Rules in Case of Rollovers of Otherwise Required Minimum Distributions in 2019 or 2020 (Section 40302)
This section waives the RMD 60-day and once-per-year limitation rules for 2019 and 2020 (which addresses the problem for any individual who took what they thought was an RMD in January 2020) as long as those amounts are rolled back into qualified retirement plans or IRAs before December 1, 2020.
Employee Certification as to Eligibility for Increased CARES Act Loan Limits from Employer Plan (Section 40303)
While the CARES Act permits eligible retirement plans to rely on an employee’s certification that the employee qualifies to receive a Coronavirus-related distribution, the statute did not make explicit that a plan can rely on such a certification for purposes of determining whether an employee is eligible for the special loan rules. Section 40303 provides that explicit clarification permitting plans to rely on an employee’s certification for purposes of the special loan rules.
Application of Special Rules to Money Purchase Pension Plans (Section 40305)
The CARES Act provided special distribution and loan rules for retirement plans during the coronavirus relief period — and while these rules were intended to apply to all qualified individual account plans, there were questions as to whether the rules would apply to money purchase pension plans (MPPP). Section 40305 makes explicit that the CARES Act rules apply to MPPPs.
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