Building Resiliency: FAQs to Help Retirement Plans in Today’s Environment

Frequently Asked Questions (FAQs)

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    Most Commonly Asked Questions

    Coronavirus_and_CARES_Act-Impact_on Retirement_Plans

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    Defined Benefit and Cash Balance Plans

    QUESTION:

    Is it true the CARES Act has waived the requirement for participants to take their 2020 RMD (Required Minimum Distribution)?

    ANSWER:

    The CARES Act did include waivers for the 2020 (and 2019 in some cases) RMDs, however the waiver does not apply to RMDs required to be taken out of Cash Balance or Defined Benefit Plans.

    QUESTION:

    I am worried about making the required contribution into my Cash Balance/Defined Benefit Plan for 2020.  Is there any funding relief available for my plan?

    ANSWER:

    The CARES Act includes funding relief in the form of a delay in contribution deadlines for defined benefit and money purchase pension plans.  Any contribution due in the 2020 calendar year now has a delayed due date of January 1, 2021.  Interest will be due on the delayed contributions from the original due to the actual payment date.  Please contact your dedicated Client Relationship Manager for more information.

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    Employee Layoffs

    QUESTION:

    Are employee layoffs considered severance of employment?

    ANSWER:

    A severance of employment is based on “facts and circumstances.” Only the employer can determine whether or not employees have a severance of employment, however there is limited guidance that may help you determine if there is a severance of employment:

    • The severance was in good faith (bona fide).
    • The individual is not treated as an employee for other purposes (such as participation in employee benefit programs).
    • There is a reasonable expectation the person will no longer be performing any more duties with the employer.

    QUESTION:

    Can employees who have a severance of employment take a distribution?

    ANSWER:

    Severance of employment is a distributable event. Please review the other questions in this FAQ for concerns around layoffs, specifically those that qualify as severance of employment.

    QUESTION:

    What happens if people who are laid off have outstanding loans from a retirement plan?

    ANSWER:

    If possible, continue to withhold and submit loan payments for participant loans as you have historically. The CARES Act does allow participants with loan payments due between March 27, 2020 and December 31, 2020 to delay their repayments for up to one year. (Note that a loan is not in default unless the participant asks for a full distribution or doesn’t make a loan payment for two quarters.)

    QUESTION:

    We may have to lay off many of our employees. Is there anything we should think about regarding our retirement plan?

    ANSWER:

    A partial plan term may be triggered if more than 20% of total plan participants are laid off in a particular year:

    • Partial terminations can occur in connection with a significant corporate event, such as a closing of a plant or a division, or as a result of general employee turnover due to adverse economic conditions or other reasons that are not within the employer’s control.
    • Current law requires all affected employees to be fully vested in their account balances as of the date of a full or partial plan termination.
      • An affected employee in a partial termination is generally anyone who left employment for any reason during the plan year in which the partial termination occurred and who still has an account balance under the plan.
      • Affected employees must become 100% vested in all employer contributions (including matching contributions) regardless of the plan’s vesting schedule.
      • Employee salary deferrals are always 100% vested.

    Contact your dedicated Client Relationship Manager to discuss your options if you experience or foresee significant layoffs in your business.

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    Plan Termination

    QUESTION:

    When is it appropriate to consider terminating a retirement plan?

    ANSWER:

    While a defined contribution (DC) plan can be terminated at any time, the step is a drastic one – and isn’t as easy or as cost-effective as you might think.

    Here are some important factors to bear in mind if you are considering terminating your DC plan:

    • The plan must distribute participant account balances as soon as administratively feasible (usually within one year).
      •  In addition to potentially jeopardizing participants’ long-term retirement security, distributed money will not share in any gains that would have occurred during a market recovery.
      • Investment manager surrender fees may apply to participant distributions.
    • All participant account balances will become immediately 100% vested.
      •  This includes any participant that was not fully vested who took a distribution after the termination date. Any such participant will need to be made whole through plan forfeitures (if available) or via a company contribution.
    • Contributions will be required for a Safe Harbor 401(k) Plan or plan with a fixed employer contribution.
    • Contributions may be required for a Money Purchase Plan.
    • In the case of a plan that includes elective deferrals, the employer cannot sponsor a plan of the same type until at least 12 months after the assets are distributed from the terminated plan.
    • Any outstanding contributions from prior plan years must be made.
    • All loans will become due and payable.
      • Participants can pay off loans in their entirety, including interest, by last day of the quarter following the calendar quarter of the plan termination effective date. If a loan is not paid in full by this date or prior to taking a full distribution of an account, the remaining balance (including any applicable interest) will be defaulted, with the balance being a taxable distribution to the participant.
    • A Form 5500 is required for any plan year for which assets remain in the plan.
      •  A final Form 5500 is required once all the plan assets have been liquidated and is due seven months after the end of the month in which the assets are distributed.

    There will be plan termination fees, including fees for processing participant distributions and administrative fees for the entire final year.

    Important Considerations:

    • If your company is temporarily closed and not paying wages, employer contributions will not be accruing. In other words, your plan may already effectively be “on hold.”
    • In lieu of terminating, the plan can be amended to reduce or eliminate required employer contributions.
      • In addition, the plan can be frozen, which will provide additional time for you to consider the future of your plan. While the plan is frozen, no contributions are made or accrued and no additional employees become eligible for the plan.
      • The plan would have to notify employees.

    Contact your dedicated Client Relationship Manager to discuss your options in more detail.

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    Profit-Sharing Contributions

    QUESTION:

    Will I need to make a Profit-Sharing Contribution this year?

    ANSWER:

    Most Profit-Sharing Contributions are not mandatory. A plan sponsor decides each year whether to make a Profit-Sharing Contribution, typically depending on that year’s profits. If you have not yet made any Profit-Sharing deposits into your plan for 2020, there is no requirement to make a contribution in 2020.

    Important Exception:

    If you have a Cash Balance Plan paired with a Defined Contribution Plan, have a Money Purchase Pension Plan – or, if your plan is considered top heavy — you may be required to make an Employer Contribution into your plan for 2020. Contact your dedicated TRA Client Relationship Manager to see if these conditions apply to your plan.

    QUESTION:

    TRA previously calculated our 2019 Profit-Sharing Contribution, but we no longer have sufficient cash flow to make it. What can my plan do now?

    ANSWER:

    Since most Profit-Sharing Contributions are not mandatory, you have several options related to the funding of a 2019 Profit-Sharing Contribution that is already calculated and not yet deposited/allocated to participants’ accounts:

    1. If you did not yet claim the contribution on your 2019 company tax return, there is no rush to make a decision on whether or not you will make a Profit-Sharing Contribution for 2019.
    2. If you already claimed the Profit-Sharing Contribution on your 2019 company tax return and you have not yet filed it, please contact your accountant to discuss the implications of not making a 2019 Profit-Sharing Contribution.
    3. There is the possibility that the IRS will provide relief on funding requirements. We’ll keep you apprised of developments.

    Important Considerations:

    • Contact Your TRA Client Relationship Manager if you ultimately decide that you cannot make a planned 2019 Profit-Sharing Contribution. We will revise your 2019 Annual Administration Report at no charge to remove the Profit-Sharing Contribution allocations.
    • Contact your accountant to discuss any changes to 2019 or 2020 Profit-Sharing Contribution amounts you decide on for tax-reporting purposes.
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    Required Minimum Distributions (RMDs)

    QUESTION:

    Is there any relief in the CARES Act related to Required Minimum Distributions (RMDs)?

    ANSWER:

    Yes.  The CARES Act includes relief related to RMD payments from qualified Defined Contribution plans*.  This includes RMD payments that normally would have been required in 2020 for the following:

    • Participants who turned age 70 ½ prior to 2019 will not be required to receive their ongoing RMD for 2020
    • Participants who turned age 70 ½ in 2019 and did not receive their first RMD for 2019 on or before January 1, 2020 or their 2020 RMD
    • Beneficiary RMDs for beneficiaries receiving life expectancy payments
    • Beneficiaries who have an account balance that is subject to the five-year distribution rule may extend their required distribution by one year (full distribution of the account must be made by the 6^th anniversary of the participant’s death).

    *The CARES Act does not provide any relief for RMDs from Defined Benefit or Cash Balance Plans

    On June 23, 2020, the IRS issued additional guidance (IRS notice 2020-51), for participants who received a 2020 RMD who would have otherwise been waived under the CARES Act. The amount distributed as an RMD is now eligible for rollover into an eligible retirement plan by August 31, 2020, without regard to the normal 60-day limitation. Please note there are special limitations for RMDs taken from an IRA.

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    Safe-Harbor Contributions

    QUESTION:

    Can I stop my Safe-Harbor Contributions?

    ANSWER:

    If your plan has a mandatory Safe-Harbor Contribution (either matching or non-elective) – and if you are a TRA client — the answer is: Yes.

    TRA’s annual Safe-Harbor Notices include language allowing a mid-year reduction or full suspension of Safe-Harbor Contributions.

    However, while TRA can amend your plan at your request to remove the provision for Safe-Harbor Contributions mid-year, be aware that your plan must:

    • Provide a discontinuance notice to employees 30 days prior to the reduction or suspension of contributions.
    • Make Safe-Harbor Contributions for the period the provision was in place during the plan year.
    • Perform non-discrimination (ADP and ACP) testing for the entire plan year, using the current year testing method.

    On June 29, 2020, the IRS issued additional guidance (IRS notice 2020-52), clarifying that sponsors who reduce or suspend 401(k) safe harbor nonelective contributions will satisfy the 30-day supplemental notice requirement, provided the sponsor:

    • Gives the notice to employees no later than August 31, 2020
    • Adopts the required plan amendment no later than the effective date of the reduction or suspension of safe harbor nonelective contributions.

    There is no relief on the timing of the supplemental notice under Notice 2020-52 for sponsors who reduce or suspend safe harbor matching contributions. Sponsors must give 30 days’ notice via a supplemental notice to participants before the reductions can take place.

    Important Considerations:

    • If you stop Safe-Harbor Contributions mid-year, your plan will be subject to top-heavy testing. If your plan is found top heavy, it could trigger a required employer contribution to the plan.
    • There is the possibility that the IRS will provide relief on funding requirements. We’ll keep you apprised of developments.
    • You can potentially delay ongoing contributions by amending the timing of those deposits to be plan-year based, or even stopping and potentially starting your non-elective contribution.
    • Contact your TRA Client Relationship Manager to discuss your options regarding Safe-Harbor Contributions.
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    Suspend or Discontinue Employer Match Contributions

    QUESTION:

    How can we stop or suspend the matching contributions we are putting into our plan on behalf of our employees?

    ANSWER:

    There are several options depending on how the match provisions are set up in your plan document.

    If your plan document has a:

    • Fixed match formula – You may be able to amend your plan to remove or reduce the match amount due for the 2020 plan year.  Please contact your dedicated CRM to review the options specific to your current plan provisions.
    • Discretionary match provision (no written formula) and an annual or unspecified computation period – You can stop depositing match contributions at any time. At plan year-end, TRA will help you determine any adjustments on the match amount deposited to ensure it has been allocated per the terms of the plan document.
    • Discretionary match provision (no written formula) and a payroll-based computation period — You can amend your plan document to reflect an annual computation period and temporarily stop making the match contributions. At plan year-end, TRA will help you determine any adjustments on the match amount deposited to ensure it has been allocated per the terms of the plan document

    Important Considerations:

    • If your company is temporarily closed and not paying wages, no employer contributions are due, since there are no wages for employees to defer off of — and consequently, no deferrals to earn match contributions on.
    • If you are considering stopping or suspending match contributions, contact your dedicated Client Relationship Manager to discuss your options in more detail.
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    Withdrawals and Loans

    QUESTION:

    I’ve heard the CARES Act has some provisions that would provide relief to plans and their participants for withdrawals and loans. What are these provisions – and who is eligible to benefit from them?

    ANSWER:

    The CARES Act provides loan and withdrawal relief to qualified individuals. A qualified individual must meet one of the following criteria:

    • Participant, spouse or dependent diagnosed with SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug and Cosmetic Act)
    • Participant, participant’s spouse or member of participant’s household experienced adverse financial consequences as a result of the following:
      • Being quarantined, furloughed, laid off, or having work hours reduced
      • Being unable to work due to lack of childcare
      • Closing or reducing hours of a business that they own or operate
      • Reduction in pay or self-employment income
      • Having a job offer rescinded or start date for a job delayed
    • Meet other factors as determined by the Secretary of the Treasury

    QUESTION:

    I know my 401(k) plan participants are having financial difficulties that stem from COVID-19-related issues. As their employer, how can I help?

    ANSWER:

    There are several possible courses of action:

    1. Even if your plan does not currently allow for hardship distributions, you could amend the plan document to allow for this. Contact your Client Relationship Manager at TRA to discuss how to amend your plan.
    2. If your plan document permits – and a loan would not hurt the participant’s financial situation further – a loan from the plan to the participant is another possibility.

    Important Consideration:

    The CARES Act allows you to approve loans and/or coronavirus distributions from your plan, even if the plan document does not currently allow them. The CARES Act states that you must update your document to permit the changes you elect no later than the last day of the first plan year beginning on or after January 1, 2022 (governmental plans have until 2024 to amend).  The TRA Team is aware of this allowance in the CARES Act and will work with you as needed to amend your plan.

    3. If your plan allows for in-service withdrawals — and the participant meets in-service distribution criteria — he or she could apply for an in-service distribution.

    QUESTION:

    How do I handle outstanding participant loans while our business is temporarily closed or while employees are not working for longer periods?

    ANSWER:

    If possible, continue to withhold and submit loan payments for participant loans as you have historically. The CARES Act does allow qualified individuals with loan payments due between March 27, 2020 and December 31, 2020 to delay their repayments for up to one year.

    QUESTION:

    If a participant takes a loan now, and then works irregularly, how would that impact their loan payments?

    ANSWER:

    TRA’s Processing Team will work with you to determine the first payment date that will work best for you and your employee. Contact your TRA Client Relationship Manager to initiate the conversation with our Processing Team. We aim to pick a first payment day within roughly one month of when the loan is processed, and we set up the payment schedule to match your payroll schedule.