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Retirement Plans: Cash Flow Problem Solver

Cash flow is a big concern for both employers and employees, and the $2 trillion coronavirus economic relief bill and existing regulations provides an unlikely beneficiary — retirement plans..

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is best known for providing much needed financial assistance to American workers and businesses. However, the bill also relaxes the retirement account withdrawal and borrowing rules. These provisions are similar to what the federal government put in place during Hurricanes Harvey and Irma in 2017.

In addition, existing rules give employers who can show a need a break from providing matching contributions.

The following is what you and your employees need to know if the need for extra cash is of upmost importance:

Employees

Distributions: The CARES Act allows some employees to borrow up to $100,000 from their retirement accounts for coronavirus-related expenses. The Act eliminates the 10 percent penalty on early withdrawals before the age of 59 ½ of up to $100,000.

Prior to this change, employees were only permitted to borrow the lesser of $50,000, or one-half of their vested account balances from their 401(k) or 403(b) plans. However, now through Sept. 28, 2020, the CARES Act allows for employees to take out loans equal to the lesser of $100,000 or 100% of their balance, and eliminates the limit of 50 percent of the borrower’s account balance.

Again, in order to qualify for the higher limit, the loan must be related to the coronavirus and may only apply to those who experience the following conditions between now and Dec. 31, 2020:

  • Are officially diagnosed with the SARS-CoV-2 virus or coronavirus disease (COVID-19)
  • Have a spouse or dependent who is diagnosed with the virus or disease
  • Have experienced financial hardship from quarantine, layoffs, reduced hours or furlough or the closing of a business
  • Are unable to work (or work from home) due to lack of childcare

The CARES Act specifies that employers may accept an employee’s certification that a coronavirus-related distribution is necessary.

Distributions still will be included in gross income and subject to regular income tax, but the taxes can be spread out and paid over three years.

The CARES Act also drops the requirement for employer plans to withhold 20 percent of any distribution that isn’t rolled directly to an IRA or other qualified retirement plan — provided that it is a coronavirus-related distribution.

Salary Deferrals: Federal law has always allowed employees to reduce or cancel the amount of money they put in their qualified retirement plans. Although this is one way for employees to get some extra cash in their paychecks, they need to remember that this amount will now be taxable.

Future Concerns: As always, employers should remind employees to take into consideration their age and likelihood of having enough time to rebuild their account balances before taking advantage of loans or deferring their salaries.

Employers

Matching Contributions: In order to free up cash, employers who offer 401(k) defined benefit pension or other qualified retirement plans may amend their plans to forego their employer matching contributions. Under section 412(c)(2), the IRS may grant a temporary waiver of funding deficiency for an employer that fails to make a timely required minimum contribution to a defined benefit plan for a tax year due to a ‘business hardship’ which is defined as when:

  • An employer is operating at an economic loss
  • There’s substantial unemployment or underemployment in the trade
  • The sales and profits of the industry concerned are depressed or declining
  • It’s reasonable to expect the plan will be continued only if the waiver is granted

Employers who have 401(k) safe harbor plans are required to make annual contributions. Eliminating safe harbor employer contributions or matching contributions may result in the loss of safe harbor status. To preserve the safe harbor status employers must show that they are operating at an economic loss. Employers must provide employees with a 30-day notice that they are going to suspend employer contributions (unless the IRS grants an exception) and they are required to fund the contribution through the date they suspend contributions.

Employers have until the end of the first year beginning on or after Jan. 1, 2022, to adopt any necessary CARES Act amendments. It’s recommended that any decisions made regarding the Employee Retirement Income Security Act (ERISA) or CARES Act be made in consultation with a third-party administrator or legal counsel.