CARES Act: 5 areas sponsors should focus on to help retirement plan participants

Provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 have many benefit sponsors scrambling to make sure their company retirement plans are in compliance with the new regulations, should they choose to implement them. Plan sponsors know time is of the essence to help employees during this crisis. That’s where the CARES Act comes into play. If certain criteria (see below) are met, the CARES Act allows individuals to take a coronavirus-related distribution (CRD) from their retirement account to mitigate the financial impact of the pandemic.

Over the past two months, more than 36 million people have filed unemployment claims. However, over the next several months, more businesses will add employees to their payrolls, which will help lower the country’s unemployment rate that is near historic highs (currently around 14.7 percent).

Meanwhile, CRDs may be the best option to help employees get through this dark period. Here are five areas that benefits executives should focus on to help employees access their retirement funds and manage plan compliance:

1. Who is eligible for a coronavirus-related distribution?

The CARES Act stipulates that plan participants must meet one of the following criteria to qualify for a CRD (see below). Also, participants, not employers, are required to prove they meet the conditions to qualify for a CRD:

• Diagnosed with the virus SARS-CoV-2 or COVID-19 by a test approved by the Centers for Disease Control and Prevention (CDC).
• The participant’s spouse or dependent has been diagnosed with the virus or disease by a CDC-approved test.
• The participant has experienced “adverse financial consequences” from being quarantined, furloughed or laid off from work; has had work hours reduced due to the virus; has been unable to work due to lack of child care because of COVID-19; has reduced hours of a business owned or operated by the participant; or other factors determined by the Secretary of the Treasury.

One important point about CRDs and married couples: If a participant’s spouse has adverse financial consequences due to COVID-19, then the participant can take a coronavirus-related distribution.

2. Key retirement plan withdrawal provisions of the CARES Act

The CARES Act lists several new provisions that permit individuals to withdraw or borrow from their retirement savings. Here the four most important new rules:

Withdrawal amounts: If their employer retirement plans allow withdrawals, participants affected by the coronavirus can take out up to $100,000 from company and personal retirement accounts.

The withdrawal will not be hit with the mandatory 20 percent withholding tax. The 10 percent federal penalty tax for early withdrawals will also be waived for participants under the age of 59½.

Taxes on withdrawals: The ordinary income tax on the withdrawal can be paid over a three-year period. No tax will be charged if the withdrawal is paid back within three years.

Plan loans: Participants in plans that permit loans can borrow up to $100,000 – double the previous amount – or 100 percent of the vested account balance, whichever is less. Participants have until September 23, 2020, to borrow the funds.

Loan payments: Individuals who already have borrowed from their retirement plan are allowed to suspend loan payments for up to one year.

3. Act now, amend later

As with most new regulations, benefits executives will need to review plan documents to determine if any amendments are necessary.

The good news from the CARES Act is that plan changes can be implemented – and become effective immediately – without having to update plan documents.

Sponsors have until the last day of the first plan year that begins on or after Jan. 1, 2022 – which means company plans with a calendar year will have to be amended on or before Dec. 31, 2022.

Sponsors should document CARES Act changes just as they would any significant modification to the plan. The decision-making process and approvals should be included in meeting minutes for audit purposes.

4. Use existing communications channels to inform employees of plan changes

Benefits executives need to communicate with employees and retirement plan participants as soon as changes related to the CARES Act have been approved.

Sponsors should use existing communications channels (email, company intranet, text messages, letters, company-wide or department meetings) to inform participants about changes to the retirement plan.

Lastly, make sure employees have all the necessary documents required to make withdrawals or loans.

5. Don’t forget about the accounting department

Changing the retirement plan to permit withdrawals and loans requires the input of your accounting department. Before one penny is withdrawn or loaned, work with company accountants to ensure the accounting entries are properly documented.

The CARES Act is a big step forward in helping our country manage the current economic downturn. By acting quickly and documenting changes along the way, benefit executives will sleep better at night knowing their company retirement plans are in compliance and that they have provided their employees the funds needed to get through this crisis.

Disclosure: Argent Retirement Plan Advisors, LLC is an SEC registered investment adviser. A copy of our current written disclosure discussing our advisory services and fees is available upon request. Please See Important Disclosure Information at https://argentfinancial.com/disclosure.

Linde Murphy CRCP is Managing Director, Institutional Services at Argent Financial.