As we adjust to life during, and after, the COVID-19 outbreak, families and businesses alike are faced with worrisome financial uncertainty. Gov. Andrew Cuomo’s order requiring that all “non-essential” workers in New York state remain at home and certain businesses temporarily shut down has forced employers to layoff, furlough or terminate employees. These public health measures have resulted in significant financial disruptions. Families have suddenly become hard-pressed to meet basic needs.
Experience has taught us that during national economic crises, government has offered legislative relief intended to provide desperately needed cash for both families and businesses. The U.S. Senate passed bill S.3548, the Coronavirus, Aid, Relief, and Economic Security (CARES) on Wednesday. The Act includes several provisions affecting employer-sponsored retirement plans, including 401(K) plans. These provisions would expand employee access to their retirement funds and would also alleviate some of the financial, tax and administrative burden on employers.
Employee (Participant) Relief
Currently, participant “hardship” withdrawals from 401 (K) plans are only permitted for a limited set of circumstances (preventing foreclosure, purchase of a new home, tuition, funeral expenses, etc.), and these withdrawals are subject to regular income tax plus an additional 10% early withdrawal penalty if the individual is under age 59½. The Act waives the early withdrawal penalty and expands the hardship reasons to include COVID-19-related illness involving the individual and dependents, adverse financial consequences as a result of quarantine, layoff, reduction in hours, loss of work, etc. The Act would additionally allow the ability to repay withdrawals and spread tax payments over a three-year period.
Participant loan provisions are also greatly expanded. The Act doubles the current retirement plan loan limits to the lesser of $100,000 or 100% of the participant’s vested account balance, adjusted for any loans taken in the past 12 months. Under certain circumstances, individuals with a current loan can delay their loan repayment(s) for up to one year.
The Act provides a temporary waiver of Required Minimum Distributions (RMDs) for 2020, allowing individuals to keep funds in their retirement plans and IRAs. Under current law, individuals generally must take an RMD from their retirement plans and IRAs annually, beginning at age 72.
Retirement plan sponsors can adopt these CARE Act provisions immediately, even if the plan does not currently allow for hardship distributions or participant loans, provided the plan is amended on or before the last day of the first plan year beginning on or after Jan. 1, 2020, or later if prescribed in the final regulations.
The CARES Act would ease the financial burden on employers who sponsor retirement plans as well. Pension plans are given more time to meet their funding obligations by delaying the due date for contributions. Any contributions otherwise due during 2020 could be delayed until Jan. 1, 2021.
Effective in 2020, pension plan sponsors would be able to fund any unfunded liabilities over 15 years, rather than the current seven years. Additionally, the interest rates used in pension funding calculations allow “smoothing” over a longer period. Pension plan funding would be developed using higher interest rates, producing lower annual pension obligations for the business.
Aside from these potential CARES Act provisions, employers may be able to suspend Defined Contribution retirement plan contributions to preserve cash to fund payroll and essential business needs. If a plan provides for a discretionary employer contribution or 401(K) matching contribution, the plan sponsor could temporarily suspend those contributions.
With the Senate passing the CARES Act and anticipating the U.S. House of Representatives to do the same, families and business can expect to find much-needed financial assistance forthcoming. Your retirement plan is one short-term source of financial relief in these turbulent and uncertain times.
It is important to work with your professional advisors in charting a path forward for your family and, if you are a business owner, for your company.
Patrick Burke is the Managing Principal of Burke Group, a Rochester-based Retirement Plan Consulting & Administration, Actuarial Services and Compensation Consulting firm.