The Impact of COVID-19 on Employee Benefit Plans
After wrapping up a year full of changes, employee benefit plans have not been exempt from the reaches of the COVID-19 pandemic. January 2020 saw the enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, the most extensive retirement reform to impact the economy since the Pension Protection Act of 2006. As those of us in the industry worked on translating the impact of all 29 new provisions for our clients, we were suddenly faced with a more pressing issue – responding to the impact of COVID-19 on retirement plans.
The Cares Act
To help mitigate the sharp economic decline that was unfolding as a result of COVID-19, lawmakers moved quickly in March 2020 to pass the Coronavirus Aid, Relief, and Economic Security (CARES) Act. In addition to providing relief for tax-qualified retirement plans, the CARES Act also allowed health care flexible spending accounts to be used for over the-counter items, provided for updates to the administration of group health plans and allowed employers through year-end to reimburse employees for student loan payments tax-free, among other items.
Impact on Defined Contribution Retirement Plans With the expectation that retirement plan participants may turn to their retirement plan accounts to assist with financial hardships, the CARES Act reduced restrictions related to distributions, loans and minimum required distributions. These new optional provisions were immediately available for implementation, and plan sponsors generally have until 2022 to adopt the related plan amendments.
For qualified individuals meeting one of several criteria, including COVID-19 diagnoses, reduction in work hours, reduction in compensation or household financial impacts, among others, a new form of distribution called a Coronavirus Related Distribution (CRD) was created. A CDR allowed for withdrawals up to $100,000 without being subject to the 10 percent excise tax applicable to early withdrawals. While the withdrawal would still be subject to ordinary income tax, the tax owed could be spread in equal installments over a period of up to three tax years. Participants have the option to avoid taxation by repaying all or a part of the distribution within the immediately following three-year period in one or more payments.
Also, for qualified individuals meeting the same criteria, the CARES Act temporarily doubled loan limits for 180 days after the Act's date. The loan limits were the lesser of $100,000 or 100 percent of the participant's vested account balance and were referred to as Coronavirus Related Loans (CRL). Also, loan repayments due between the enactment of the CARES Act and December 31, 2020, could be suspended for up to one year.
Finally, plans were allowed to waive required minimum distributions that were due in 2020 to ensure participants were not locked into market losses incurred as a result of COVID-19.
Impact on Defined Benefit Retirement Plans The relief offered to defined benefit plans as part of the CARES Act primarily relates to funding. Due to very low interest rates and the volatile stock market experienced in the early part of 2020, plan sponsors were potentially facing large contribution requirements. The CARES Act extended the deadline for minimum required contributions due in 2020 to January 1, 2021. The extension is applied to quarterly and year-end contributions, and the extended payment must be adjusted accordingly for interest.
Also, the CARES Act stated that plan sponsors could (but are not required to) choose to use the plan's adjusted funding target attainment percentage (AFTAP) for the plan year ending in 2019 when determining whether Internal Revenue Code Section 436 benefit restrictions apply to any plan year that includes the 2020 calendar year. This provision potentially eliminates restrictions on plan amendments and amounts that may be paid as lump sums for plans falling below 80 percent AFTAP due to market performance in the first half of 2020.
Partial Plan Terminations
Many plan sponsors were faced with difficult decisions to lay off or furlough employees in 2020. When businesses terminate or lay off a significant number of employees, a "partial plan termination" may have occurred in the eyes of the IRS. In such situations, the IRS requires employees covered under the plan to be deemed 100 percent vested in matching and other employer contributions. If the Plan Sponsor does not recognize that this has happened, participants may be underpaid when distributions occur. These underpayments can result in the need for corrections or even disqualification of the plan.
Revenue Ruling 2007-43 provides the following guidelines to assist in determining if a partial plan termination has occurred:- The IRS presumes partial plan termination when an employer reduces its workforce (and plan participation) by 20 percent. Normal turnover does not result in a partial plan termination.
- The rate is calculated by dividing employees terminated from employment by all participating employees during the "applicable period."
- The applicable period is generally the plan year but can extend to cover up to two years based on facts and circumstances.
- Voluntary separation by the participant (e.g., retirement, death, etc.) is not factored in the calculation.
Many plans will likely need to examine the activity that occurred within their plans during 2020 to understand the facts and circumstances involved in any significant workforce reductions to ensure appropriate treatment if a partial plan termination has taken place.
Reducing Or Suspending Employer Contributions
One frequent consideration of plan sponsors during 2020 was whether they could reduce or suspend employer contributions. For companies that applied for and received funds from the Paycheck Protection Program (PPP), these match contributions counted towards their forgiveness calculations, creating an incentive to continue matching contributions. However, many companies were also searching for ways to reduce cash outflow. Plans that did not utilize a safe harbor plan design could likely reduce or even eliminate the employer contributions prospectively.
For employers with either safe harbor match or nonelective contributions to be allowed to reduce or suspend contributions mid-year, all of the following conditions must be met:- Either: a) The company is operating at an economic loss. b) The safe harbor notice provided before the start of the plan year includes a statement that the employer may reduce or suspend contributions mid-year.
- A supplemental notice is provided to eligible employees at least 30 days before the effective date of the reduction or suspension.
- Participants have a reasonable opportunity to change their deferral election before the effective date.
- The plan is Actual Deferral Percentage (ADP)/Actual Contribution Percentage (ACP) tested for the full plan year in which the change occurs using the current year testing method.
- The plan meets top-heavy minimum contribution requirements in the year the change occurs.
An election to exit out of the safe harbor status, if allowed, cannot be reversed later in the year; therefore, it would not be reinstated until the following year.
Cybersecurity Related To Employee Benefit Plans
The current COVID-19 environment has resulted in increased requests for distributions and loans, individuals remotely accessing plan-related information, and companies potentially giving less attention to these assets as they focus on changes in business practices. As a result, an increasing amount of litigation related to cybersecurity breaches is being seen in the courts, leading to discussions on the fiduciary responsibilities in this area. One of the characteristics of an employee benefit plan that makes it an attractive target for hackers is the numerous interfaces with plan sponsors, third parties and participants, expanding the number of potential entryways for access.
As detailed in recent litigation, hackers are going through channels such as the "forgot password" button or calling the plan's customer service line to gain access. Therefore, it is critical to understand how recordkeepers authenticate participants. Fiduciaries should take the time to understand if the service provider offers a multi-factor authentication and what happens when participants call into the recordkeeper's service center. An effective process includes asking for various items and ideally more high-tech tools such as tokens.
Noting that management of third-party service providers is one of the significant areas of vulnerability plan fiduciaries face, on October 28, 2020, the Department of Labor (DOL) announced that it is working on an informal guidance package addressing cybersecurity issues related to employee Noting that management of third-party service providers is one of the significant areas of vulnerability plan fiduciaries face, on October 28, 2020, the Department of Labor (DOL) announced that it is working on an informal guidance package addressing cybersecurity issues related to employee.
Looking Further Into 2021
While plan sponsors coped with the impacts of COVID-19 on their retirement plans during 2020, many auditors will face the impact in 2021 as they work through plan audits. Topics that are front of mind include: potential changes in internal controls for the plan sponsor in a remote environment, implications on SOC 1 reports for the recordkeepers, CARES Act transactions, investment performance, layoffs and partial plan terminations, and plan amendments and going concern considerations. These topics, including any additional legislation, passed over the next few months, and more will be discussed at GSCPA's 2021 Employee Benefit Plan Conference in May. The conference is an excellent opportunity to connect with employee benefit plan leaders and ensure you are prepared to tackle the changes on the horizon this year. I highly encourage employee benefit plan auditors to attend, and I look forward to networking with all conference attendees.
CANDACE JACKSON, CPA, is a partner in Moore Colson's business assurance practice and leads the Employee Benefit Plan Audit practice area. In addition to overseeing EBP audits, Candace provides audit and accounting services for companies in the transportation, manufacturing and distribution industries. Contact: cjackson@moorecolson.com or 678-385-6036.