If a plan sponsor wants to increase the amount or expand the eligibility for taking a loan from a retirement plan, those sponsors should act quickly to discuss changes to their plan with their attorneys and advisors as well as initiate changes with their plan administrator. These changes may trigger requirements to file with the Department of Labor.
There are a great number of questions about how the CARES Act may change the work processes and workflow for plan sponsors. Here, we outline some ways that could happen so that plan sponsors can modify their work to meet their employees’ needs. This article is the third in a series of three discussing the CARES Act.
Earlier, we prepared an FAQ on how plan sponsors can use the CARES Act provisions to help their employees. There, we made clear that many plan sponsors will need to alert their plan administrators of changes to their plans. These articles expand on that information and we urge plan sponsors to review those FAQ and discuss with their leadership teams.
As discussed in the other articles in this series, the CARES Act allows eligible participants to request distributions from their retirement plan of amounts up to $100,000 for coronavirus-related reasons. The CARES Act also extends loan repayment periods in some circumstances. Examples include the hardships based on a diagnosis of COVID-19 individually or in the immediate family (spouse or dependent), or due to suffering a financial burden arising from stay-at-home orders, such as being furloughed, laid off, reduction in work hours, or interference with work due to lack of childcare.
The first thing plan sponsors need to be aware of is the deadline for employees to take those loans. Under the CARES Act, loans must be taken before September 23, 2020. That means, if a plan sponsor wants to increase the amount or expand the eligibility for taking a loan from a retirement plan, those sponsors should act quickly to discuss changes to their plan with their attorneys and advisors, as well as initiate changes with their plan administrator. These changes may trigger requirements to make filings with the Department of Labor, such as Summaries of Material Modifications, among other items. Those filings may also have deadlines. As we stated our FAQ, “While you as plan sponsor can elect to start utilizing any of these provisions immediately, the plan must be formally amended for those new options generally no later than the last day of the first plan year beginning on or after January 1, 2022.” Many sponsors may seek comfort that the changes they make to their plan meet IRS tests through a determination letter (advising that the proposed changes will meet IRS guidelines). As the IRS notes, “The IRS administers a determination letter program that enables plan sponsors to get advance assurance as to the form of their retirement plan document.” This determination letter process can take more than 6 months and could take a full year or more.
Next, plan sponsors should take into account that repayment deadlines for loans that have already been made could be extended. As we noted in our FAQ, “Subject to plan approval, scheduled participant loan repayments due from March 27, 2020 (the enactment of the CARES Act) through December 31, 2020, may be delayed for up to one year for qualifying employees.” Plan sponsors and their business process systems set up to work with employees and retirees may need to flex to change the date on which those loans are due.
Other workflows may need to change in terms of how hardship is documented. The IRS does not require that employees prove hardship for withdrawals from their 401(k)s. The CARES Act does not require that the plan sponsor verify that the employee seeking a COVID-19 loan meets those requirements. However, the employee must certify that they meet those requirements. That process may require new or different processes. Plan sponsors may want to discuss recordkeeping requirements for this certification. An employee’s COVID-19 information could fall within the kind of protected health information that HIPAA and other state health information legislation requires to be protected. Moving now to protect that information appropriately could ease the burden on plan sponsors later. This is especially true for human resource departments that are operating remotely.
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, advisors and plan sponsors should consult with their compliance, finance and legal teams. The information here reflects a summary of our current understanding of certain provisions in the CARES Act. There are other significant changes in the CARES Act that may impact your business. As with any new law, the CARES Act’s meaning is subject to further clarification and change, as many questions are yet to be answered. Clients should consult with their tax and legal advisors regarding their specific situation.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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