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Operating your business’s 401(k) plan during COVID-19

Mar 31, 2020

The disruptions caused by COVID-19 are raising many questions about the operations of 401(k) plans. 

Here are the answers to the top questions we have been receiving.

Do we have options to suspend or delay the company contribution?

If the company contribution to the plan is a discretionary match and/or nonelective contribution, you are permitted to stop the contribution at any time without any further changes to your plan needed. While there is no requirement to notify employees the discretionary company contribution will be stopped, it would be best practice to do so, especially in the case where you are matching employee contributions made to the plan. 

Notifying employees will give them the opportunity to consider whether they’d like to change their employee deferral deduction as well. We would recommend notifying employees 30 days before the matching contribution would cease. 

Keep in mind, you have until the due date of the company’s tax return filing to make discretionary match and/or nonelective contributions to the plan, including extensions. If you decide to stop the company contribution to the plan, it may only be necessary to do so temporarily, and you could decide to deposit at a later date.

If the company contribution to the plan is a required safe harbor match or nonelective contribution, you may be able to suspend the safe harbor contribution if you meet one of two requirements: 

  1. You are operating at an “economic loss” 
  2. You had a disclosure within your annual required safe harbor notice that you may suspend or reduce the safe harbor contribution after providing participants with a supplemental notice 

If you meet one of these two requirements, you will be able to suspend the safe harbor contribution after taking some additional steps. 

First, you will need to work with your third-party administrator (TPA) to amend the plan document to remove the safe harbor contribution from the plan. Along with that amendment, you will need to decide the date on which you will stop the contribution to the plan. The IRS requires a 30-day advance notice to plan participants.

Lastly, the safe harbor match or nonelective contribution will be required to be deposited through the end of the 30-day period communicated to participants. In suspending the safe harbor contribution, your TPA will need to complete the Actual Deferral Percentage (ADP) test and Actual Contribution Percentage (ACP) test if applicable for the entire plan year. Therefore, you may need to consider whether adjustments to highly compensated employee deferral amounts should be made and if the plan is top heavy. 

Please note, if you would like to adopt the safe harbor match or 3% safe harbor nonelective provision for the next plan year, you are able to do so no later than the 30th day before the close of the plan year given the new legislation under the SECURE Act.  

Note that the SECURE Act also allows you to add a minimum 4% safe harbor nonelective contribution after the 30thday before the close of the plan year if the plan is amended to provide for a contribution to all eligible employees for the plan year and the plan is amended no later than the last day of the following plan year. 

Finally, the SECURE Act eliminated the requirement that an employer who makes nonelective safe harbor contributions must distribute an annual safe harbor notice. The IRS will need to provide future guidance as to how this change impacts the ability to suspend or reduce nonelective safe harbor contributions.

In the event your plan has a required match and/or nonelective contribution (not safe harbor), you can stop that contribution at any time with a required 30-day notice to participants. You will need to work with your TPA to amend your plan to eliminate the required contribution and notify employees of the date on which the contribution will cease.

When are employee contributions and loan repayments due to the plan?

At this time, there are no allowances being provided to employers in remitting employee contributions and loan repayments to the retirement plan following each pay date. The Department of Labor (DOL) requires the remittance of employee contributions and loan repayments “as soon as administratively feasible.” If you are operating a small plan (i.e., plans with less than 100 participants), the DOL has provided a seven-business day safe harbor. This means they will consider deposits timely made if the plan receives within seven business days following the pay date. For large plans, the rule of thumb should be that deposits are remitted on the same date as required tax deposits are made (usually the same day payroll is paid or the next business day).

With the IRS extending the tax filing deadline, when is our 2019 employer contribution due?

With the automatic extension of tax return filings to July 15, 2020 (for those previously due April 15, 2020), related employer contributions to the 401(k) plan will also be due July 15, 2020, in order to be deductible on your 2019 company tax return. 

If your tax practitioner files for an extension to October 15, 2020, your employer contribution will be due October 15, 2020. Please keep in mind this automatic extension was not applicable to corporate returns due March 15, 2020, as the automatic extension was granted after that tax deadline. If your tax practitioner filed an extension for the corporate tax return previously due March 15, 2020, your employer contribution is due September 15, 2020. If you are a fiscal year end or your plan year differs from your company’s tax filing year, you will want to carefully review and ensure you follow the correct due date.

Additionally, there is an extension of time to contribute to traditional IRA, Roth IRA, HSA or Archer MSA contributions for 2019 until July 15, 2020. Taxpayers do not have until October 15, 2020, if they file an extension to make these contributions.

How do we handle loan repayments if an employee is not receiving a paycheck?

Good communication with your plan provider is extremely important regarding participant loans. If an employee is on a bona fide leave of absence, the employee can delay making payments for up to 12 months. 

When the employee returns to work, they could either make a balloon payment to catch up their payments, or they could request the loan be re-amortized over the remaining life of the loan (not to exceed a five-year term, unless it was taken for purchase of a primary residence). If the employee is permanently laid off or otherwise terminates employment, any outstanding loan will go into default the end of the quarter following the quarter of their last loan payment. Loans that default will require issuance of a Form 1099-R for the participant which will trigger federal and state income taxes at their current marginal rate, plus a 10% early withdrawal penalty for participants under age 59½. 

Many providers have a schedule to automatically default loans based on the terms of the loan policy and tax participants accordingly. If the employee is on a leave of absence, expected to return to work, it is critical the provider is aware, so they do not inadvertently default loans. 

There is proposed legislation (the CARES Act) which would provide some relief to employees related to their participant loans, including doubling the $50,000 maximum loan to $100,000, along with certain delays of repayment. This legislation is pending, so there may be more to come.

Can employees access retirement plan dollars related to COVID-19 (other than taking a participant loan)?

At this time, there are no specific in-service distribution options for those impacted by COVID-19. As with the previous question related to loans, there is proposed legislation (the CARES Act) which would provide some expanded hardship distribution options and penalty relief related to those impacted by COVID-19, but that legislation has not yet passed. In the meantime, if the plan allows, employees may be able to access funds through the retirement plan via a qualified financial hardship distribution. There are three specific safe harbor hardship reasons that could qualify a participant for a distribution and help employees. The first would be to pay medical expenses for self, spouse or dependents (the primary beneficiary could qualify too if plan allows). 

The second would be to prevent eviction from or foreclosure on the primary residence. The third would be if the participant lives in a federally declared disaster area and has a loss (including loss of income). Hardship distributions are treated similarly to defaulted loans, from an income tax and penalty standpoint.

Are there any considerations we need to make in the event we lay off employees?

If you find yourself in a situation where you need to permanently lay off employees, you will want to notify your TPA right away, so they can assist you with determining whether you will have a partial plan termination. IRS guidance provides that if 20% or more of plan participants are permanently laid off, a partial plan termination is assumed. The determination though is based off facts and circumstances. The implication of a partial plan termination is that you will need to immediately vest the plan participants impacted by any permanent layoffs that take place during the plan year. Note, employees who quit or were terminated for cause are not included in the determination.

Can we shift some or all the plan expenses the company pays to the plan?

The DOL’s 404(a)(5) fee transparency efforts require plan sponsors disclose to participants the fees they may pay from their retirement plan assets annually. If a fee the company decided to pay was disclosed to participants within the most recent participant disclosure, you can shift those expenses from the plan sponsor to the plan without further notice. If it was not previously disclosed, you will need to work with your plan provider to update the disclosure and redistribute to participants at least 30 days before the fee is charged to plan participants. 

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Author(s)

Nichole Mayer
Nichole Mayer, CPA
Senior Manager
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