CARES Act 401(k) Compliance Clean Up
October 29, 2020
The CARES Act provides a number of optional coronavirus-related relief provisions that employers may choose to incorporate into their 401(k) and other retirement plans. Those provisions include penalty-free benefit distributions of up to $100,000, a doubled maximum participant loan amount, and a one-year suspension of loan repayments for coronavirus-affected participants (CAPs). There are other relief provisions that apply to participants who are not CAPs, such as right to skip required minimum distributions (RMDs) for 2020. See here for details on these relief provisions.
WHAT DO I NEED TO DO
Although formal plan amendments incorporating CARES act relief provisions generally are not required before the 2022 plan year, these provisions must be administered in "good faith" compliance with the applicable CARES Act rules. Employers and third-party administrators (TPAs) should review what they need to do to satisfy this requirement.
(1) The CARES Act relief provisions that are available only to coronavirus-affected participants cannot be extended to non-CAPs. These provisions cannot be applied to all participants even if it greatly simplifies plan administration to do so. CAP status of a participant needs to be verified in advance of making an enhanced penalty-free benefit distribution or a loan in excess of the pre-CARES Act limits.
(2) Administrative compliance will require adequate communication to participants of the terms of any CARES Act relief provision. A reasonably detailed communication should be distributed to all eligible employees—preferably in a "summary of material modification" to supplement the current summary plan description (SPD), or a revised SPD.
(3) Although a detailed SPD can be used for administrative purposes, some details may have to be addressed in a separate administrative guide or even an interim plan amendment. For example, if a retirement plan, although not required to do so, makes a distribution to a participant or retiree that would otherwise be a required minimum distribution, mandatory 20 percent withholding and participant notice requirements would not apply.
Current distribution notices (known as the 402(f) notice) would be inappropriate in those circumstances and would provide no information on rollover rights granted such participants and retirees by the CARES Act. Alternative procedures and participant notices will be required for any such distributions.
(4) Sponsors of 401(k) plans that implement a mid-year year reduction or suspension of safe-harbor contributions were required to adopt a plan amendment by August 31, 2020 (see here for details). This is a notable exception to the general rule that CARES Act plan amendments are not due until the 2022 plan year.
The bottom line is that for many employers who have chosen to extend CARES Act relief provisions to their employees, it may make sense to adopt a conforming plan amendment in 2020 even though such an amendment is not currently required. Such an amendment would not only assist with proper plan administration but also might convince an IRS or Department of Labor auditor that all CARES Act requirements have been satisfied.
For more detailed consideration of your particular compliance situation, do not hesitate to contact the benefits lawyers at Golan Christie Taglia: