Month: September 2020

CARES Act Provisions Affecting Employee Benefit Plans

CARES Act Provisions Affecting Employee Benefit Plans

Employee benefit plans are impacted by the CARES Act. Here’s what you need to know about coronavirus-related plan distributions and which of your employees may qualify for them

CARES Act Provisions Affecting Employee Benefit Plans

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress. The CARES Act provides immediate and temporary relief for retirement plan sponsors and their participants with respect to employer contributions, participant distributions and participant loans.

The provisions of the CARES Act may be effective and operationalized immediately, prior to amending the plan document. Plan amendments are not required until December 31, 2022.

Plan amendments for for coronavirus-related distributions

The Act provides that qualified defined contribution plans may be amended to allow participants to take up to $100,000 “coronavirus-related distributions” prior to the end of 2020. The distributions are exempt from the 10% early withdrawal penalty and taxable over three years. Participants can take up to three years to repay all or any part of those distributions. The repayment would be treated as a tax-free rollover when repaid to the plan.

Coronavirus-related distributions from defined benefit plans would not be permitted because of the in-service distribution restrictions generally applicable to such plans.

Repayments delayed

The Act increases the maximum permissible plan loan amount to $100,000 or 100% of a participant’s vested account balance (whichever is less) for individuals who qualify for a coronavirus-related distribution. The Act delays for one year repayments for currently outstanding plan loans that are due during the remainder of 2020 for those individuals who qualify for a coronavirus-related distribution.

A “coronavirus-related distribution” is a distribution made in 2020 to an individual who is diagnosed with COVID-19, has a spouse or dependent diagnosed with COVID-19, or experiences adverse financial consequences as a result of being quarantined, furloughed or laid off or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, or the closing or reducing hours of a business owned or operated by the individual due to COVID-19.

The Act also extends the due date to January 1, 2021 for all 2020 minimum required employer contributions for single-employer defined benefit plans.

Concerned about your employee benefit plan?

If you have further questions or concerns about employee benefit plans, contact Qiming Liu at [email protected] or 201-655-7411. You can also check our Coronavirus Resources Page for more updates.

Partial Termination of an Employee Benefit Plan

If your company has an employee benefits plan, here’s how it may be impacted if you’ve had to reduce staff during the recent economic downturn.

Employee reduction during the coronavirus pandemic will affect an employee benefit plan (“Plan”) differently depending on whether employer chooses to layoff or furlough employees. While a furlough is a temporary leave of absence from work, a layoff is a permanent separation from employment.

Furloughs vs. layoffs

Furloughed workers do not receive a paycheck, but are still considered employees; therefore, the furlough does not affect your Plan. Laid off workers on the other hand are no longer considered part of the company and your Plan can be partially terminated.

Your Plan may havePartial Termination of an Employee Benefit Plan a partial termination if more than 20% of your total Plan participants were 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.

Employers should consult with their ERISA attorneys on whether their Plan has been subject to a partial termination under the law as soon as they expect layoffs of more than 20% of total Plan participants.

Affected employees and partial terminations

The law requires all “affected employees” to be fully vested in their account balance as of the date of a full or partial plan termination. They 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.

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. Some Plans wait until an employee has five consecutive 1-year breaks in service before he or she forfeits their nonvested account balance. For these Plans, employees who left during the Plan year of the partial termination and who have not had five consecutive 1-year breaks in service are affected employees.

The IRS can potentially disqualify the Plan if companies fail to fully vest terminated employees, which would result in underpayments to former participants.

Get help with your employee benefit plan

If you have further questions or concerns about employee benefit plans, contact Qiming Liu, CPA, at [email protected] or 201-655-7411. You can also check our Coronavirus Resources Page for updates related to the pandemic’s impact on individuals and businesses.