making sense of covid-19’s impact on retirement plan ... … · – pre-tax and roth • 401(k)...

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MAKING SENSE OF COVID-19’S IMPACT ONRETIREMENT PLAN DESIGN AND ADMINISTRATION

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TODAY’S PRESENTER

John JeffreyCorporate Counsel at Alerus

Moderated by Mary Isenburg

COVID-19 PLAN IMPACTSPRESENTED BY JOHN JEFFREY

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Plan Administration/Design

Coronavirus Aid, Relief, and Economic Security Act (CARES)- Distributions- Loan Limits- Repayment Relief- RMDs

AGENDA

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PLAN ADMINISTRATION

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Code Definitions• IRC 415 – Current Income• IRC 3401(a) – Income Subject to Withholding• Form W-2

Families First Coronavirus Response Act (FFCRA)• Mandates paid leave for certain COVID-19 events• Impacts employers with 500 or fewer employees

SBA Paycheck Protection Program (PPP)• Loan to employers• Forgiven if used to cover wages/salaries

FFCRA or PPP Leaves/furloughs = Plan Compensation• Deferrals• Company contributions• Tracking of hours

COMPENSATION

Please see important disclosures on last page of this presentation.

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Deferrals and loan payments are plan assets

Employer fiduciary obligation• Must “segregate” from employer assets

– As soon as administratively feasible

Small employer Safe Harbor• Less than 100 participants• 7 business days

Other employer contributions• Due date of employer return (plus extensions)

– IRS extends April 15 to July 15• Exception – Safe Harbor Match

– If calculated on payroll basis– Contribution due by end of the quarter following payroll quarter

TIMING OF PLAN CONTRIBUTIONS


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Action • Board resolution and plan amendment• Participant notice

– MPP/DB Plans – 204(h) Notice 45 days (15 days if less than 100 participants)

– 401(k)/403(b)/profit sharing plans Immediate

Anti-cut back rule applies (IRC 411)• Employer accrued obligation remains

Vesting – 100%

Winding up required• Final census/testing• Plan administration continues• 5500 obligation continues • Final amendment for law changes (e.g. SECURE Act and CARES Act)

No alternative deferral plan • One year after final distribution

PLAN TERMINATION


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IRC 411(d) • Partial plan termination occurs IF

– Significant change to the plan OR– Employer initiated action to sever employment

• That limits employees’ rights to vest in the future

Facts and circumstances test• IRS Revenue Ruling 2007-43

PARTIAL PLAN TERMINATION


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“Turn over Rate” = 20% or more• Number of employees severed by employer action divided by• Number of eligible employees at beginning of period + newly eligible employees during the

“Applicable Period”

“Applicable Period”• Facts and circumstances• May be greater than 12 consecutive months

– If a series of layoffs

“Employer Initiated Action”• Does not count death, disability, retirement after NRA or if purely voluntary• Layoffs followed by expected rehires may delay determination

IF “Partial Plan Termination” occurred, then• Vest all “Affected Employees” • All employees who termed during the Applicable Period

– Includes voluntary and those who were layed off

Documentation• Employer could adopt a board resolution defining affected participants

REV RULING 2007-43PARTIAL PLAN TERMINATION


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Requirements• Board resolution• Signed amendment• Anti-cut back rule (IRC 411) applies

– Employer may not decrease an “accrued” benefit • Summary Material Modifications

Possible changes • Replace mandatory contributions with discretionary• Special considerations for Safe Harbor plans

PLAN AMENDMENT


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“Top Heavy”• Key employees own 60% or more of plan assets• Determined as of last day of plan year

– The “Determination Year”

“Key Employee”• Officer with compensation greater than $180,000 (2019)• 5 percent owner• 1-percent owner with compensation greater than $150,000

Minimum contribution to non-key employees• Following determination year• Generally 3% • Based upon entire year compensation • Offset by employer contributions

– Including match

WHAT’S A TOP HEAVY CONTRIBUTION?SAFE HARBOR PLANS


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Effective upon plan amendment• No advance notice to participants

Business Hardship/Acquisition • Hardship factors (IRC 412(c)(2))

– Operating at an economic loss– Substantial unemployment or underemployment in the trade/business/ industry – Sales/profits of the industry are depressed or declining

• Plan maintains Safe Harbor status – Including Top Heavy exemption

• SH Obligation to date of termination

Other reasons• Plan loses SH protection

– ADP/ACP tested current year– Top Heavy contribution (if applicable) Made to non-keys Based upon entire plan year compensation

• SH obligation to date of termination

SAFE HARBOR PLAN TERMINATIONS


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Documented reason• No reason necessary if original SH notice includes exit language

The plan may be amended during the plan year to reduce or suspend safe harbor contributions and that the reduction or suspension will not apply until at least 30 days after all eligible employees are provided notice of the reduction or suspension.

Must amend plan + provide employees 30 day notice• Regulatory requirement

– IRS could change notice requirement– SECURE Act did not do so

• Employee opportunity to change deferrals• Continued SH obligation to effective date• Current year ADP/ACP testing• Top Heavy contribution (if applicable)

Effective date is latter of• 30 days following participant notice or • Date of amendment

EXITING SAFE HARBOR MID-YEAR


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CARES ACT DISTRIBUTION

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PLAN

1. Can disregard normal distribution restrictions

- But not required 2. Can rely on Certification 3. Waive 20% withholding

PARTICIPANT

1. Can report a CARES Act distribution even if plan doesn’t adopt less stringent distribution rules

2. Has burden upon IRS audit to back up Certification

3. Reports distribution as income

COMPARE IMPACT ON PARTICIPANT VS. PLAN

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Qualified Individual – Two categories• Account holder, spouse or dependent diagnosed with COVID-19

– by CDC approved test • Account holder experiences adverse financial consequences as a result of:

– Being quarantined, – Being furloughed or laid off,– Having work hours reduced, – Being unable to work due to lack of child care, – The closing or reducing hours of a business owned or operated by the individual

Amount• $100,000 aggregate

– All plans/IRAs– Does not require plan to adopt a CARES Act provision

Covered Period• “On and after January 1, and before December 31, 2020”

INDIVIDUAL PERSPECTIVECARES ACT DISTRIBUTION


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“From an Eligible Plan”• IRAs

– Pre-Tax and Roth• 401(k)• Profit sharing• Money Purchase Pension Plan and DB plans• 403(b)• A governmental 457(b)

– Non-governmental excluded

401(k), 403(b), governmental 457(b) & federal Thrift Savings plans• May disregard distribution restrictions

Defined Benefit and Money Purchase Pension Plans– Cannot change statutory distribution restrictions E.g. no in-service distribution prior to NRA



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Tax Consequences:• 10% penalty tax IRC 72(t) waived• Mandatory withholding waived• Income recognition

– Prorated over 2020, 21 & 22 OR– All in 2020

• Rollover opportunity– Within 3 years of date of distribution– Amount rolled offsets original distribution– No IRS guidance But see IRS Form 8915B and instructions

• Similar 2017 disaster relief



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Taxation • Federal income recognition

– Minimum of one third in 2020– Consider requesting withholding

• State Taxation– May have income recognition rules different than Code

• Non-qualified Roth– Earnings Taxable

• Rollover opportunity– Amended return needed for refund

Market volatility• Selling in a down market?

Use of retirement assets• Non-retirement problem• Difficult to replace

Multiple Distributions Possible

CARES ACT DISTRIBUTIONINDIVIDUAL CONSIDERATIONS


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Optional provision• Retroactive amendment by last day of PY in 2022

Plans may overrides distribution restrictions: – 401(k)– 403(b)(7) Custodial accounts– 403(b)(11) Annuity plans and – 457(d)(1)(A) – Governmental only– 8433(h)(1) – Federal Thrift Savings Plans

Defined Benefit Plans/Money Purchase Pension Plans• Cannot override distribution restrictions

Mandatory withholding waived• Default is 10%

Participant can self-certify

CARES ACT DISTRIBUTIONPLAN CONSIDERATIONS


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CARES ACT LOANS/REPAYMENT RELIEF

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Optional Provision

Temporary • 180 days following enactment

– Loans originated by 09.23.20

Qualified Individual• Same as QI for a CARES Act distribution• Participant can self-certify

Limits Increased• $100,000 • 100% of account

Other loan rules unchanged• 12 month lookback

– $100,000 limit offset highest balance • Level amortization

– At least quarterly payments• Reasonable interest

CARES ACT LOAN LIMITATIONS


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Affordability• Compare CARES Act distribution vs. loan

– Loan default in 2021 or later Income tax (no prorating) 10% excise tax (no waiver)

Funding• May be selling investments in a down market

CARES ACT LOANPARTICIPANT CONSIDERATIONS


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Qualified Individual• Same as QI for a CARES Act distribution• Can self-certify for employer

Can forego plan loan payments• March 27, 2020 to December 31, 2020• Not a default

Payments begin January, 2021

Cure option• Repay missed payment plus interest

– Within one year of original date• Re-amortize loan

– Can extend based upon period missed in 2020 Not counted in 5 year amortization limit

CARES ACT LOAN REPAYMENT RELIEF


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CARES ACT RMDS

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Effects all 2020 RMDs• Retirement Plans and IRAs • Not limited to Qualified Individuals

2019 RMD paid in 2019• Not covered

Attained age 701/2 in 2019 • Delayed RMD to 2020

– Not required– Can be rolled if already paid

Attained age 72 in 2020• No 2020 RMD• First 2021 RMD in 2021

Attained age 73 or older in 2020• No RMD in 2020• Restart RMD in 2021

TEMPORARY SUSPENSION 2020


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CURRENT STATUS

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3.30.20 Email to Plan Sponsors • CARES Act Summary• Example of Certification• Default approach

– CARES Act Distribution– CARES Act Loans – if Plan permits loans

Distribution/Loan Process• Current process + participant certification

– Exception to on-line

Coming • Updated Certification• Addendum to Loan Policy• Participant Piece

– CARES Act Distributions, Loans, Loan Repayment Relief & RMDs

CURRENT STATUS

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Accept the defaults• CARES Act Distribution• CARES Act Loan provisions

Reject the defaults

Accept the distributions & reject the loan provisions

Reject the distributions & accept the loan changes

Other considerations• Short duration• CARES Act gives employer cover• Participants are aware of the options

EMPLOYER OPTIONS

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WE WELCOME YOUR QUESTIONS

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Trust services are offered through Alerus Financial, N.A., which does not provide legal or tax advice. Plan sponsors should always consult the plan’s legal counsel or tax advisor for advice

regarding plan-specific issues. This information should not be relied upon as investment advice. Statements of fact are from sources considered reliable but no representation or warranty is made as to their completeness or accuracy. The opinions presented in this

communication are subject to change without notice and no representation is made concerning actual future performance of the markets or economy.

DISCLOSURES

making sense of covid-19’s impact on retirement plan ... … · – pre-tax and roth • 401(k)...

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