As a critical partner to your business, Compensation Systems, Inc. understands the importance of our ability to continue to support our clients and their employees amidst this global health event.
The health and well-being of our associates, clients, and their employees is of utmost importance to us. We have been monitoring Coronavirus (COVID-19) developments closely through local authorities, the U.S. Centers for Disease Control and Prevention, and the World Health Organization. As the situation continues to evolve, we are keenly focused on our preparedness efforts to maintain a safe work environment for our associates and to sustain our business operations.
Resources for Plan Sponsors (FAQs)
Extensions of Restatement & Deadlines
Client Question: I am wondering if the IRS is considering extensions of the 403(b) plan restatement deadline (currently March 31, 2020) and/or the defined benefit plan restatement deadline (currently April 30, 2020)?
ASC Response: The American Retirement Association (ARA) has asked the IRS to extend both the 403(b) plan restatement deadline and the defined benefit plans restatement deadline. See links to the ARA comment letters above. ARA is requesting a one-year extension for the 403(b) plan restatement period and a 120-day extension for the defined benefit plan restatement period. At this time, while optimistic, we are uncertain that the IRS will provide the extensions. We recommend that employers and document providers try as best they can to meet the current deadlines.
Termination of Employment/Severance from Employment/Leave of Absence
Client Question: I have some interesting thoughts and questions. A number of our employers have contacted us regarding the issues with the COVID-19 recommendations. Some are doing temporary layoffs, with some or all of the staff immediately applying for unemployment benefits. Some employees may continue to work and receive unemployment benefits at the same time (if allowed under state law). Some businesses may close temporarily while considering what to do, but still deem their employees as employed and not terminated. Most of our plans allow some in service distributions, and/or hardship distributions. Most require repayment of outstanding loans as of the date of termination.
Due to all of the uncertainties, currently my questions are: If an employer is doing what is deemed as a temporary layoff, is the Participant affected considered terminated and do these plan provisions become immediately applicable? If an employee is working part time and also receiving unemployment benefits would they still be considered as an employee and therefore not subject to the terminated participant provisions? If an employee is working less hours than usual and does not have enough compensation to pay their loan payments after living expenses are they able to renegotiate their payments even without that provision in the loan policy? Do you know if the IRS/Regulatory bodies are considering any guidance or legislation about this? If so, do you think it will be similar to the disaster relief provisions passed previously? There are a number of additional issues that are bound to arise, i.e., break in service, continuous employment, loan offsets, automatic rollovers, etc. Any suggestions as to where to look for guidance?
Client Question: I'm sure you are getting flooded with questions with everything going on. We have a handful of restaurant / bar clients who are trying to navigate everything and are looking for a definition of termination of employment. Does ASC have one?
Client Question: We are having some clients who are furloughing employees and others who are calling it a layoff, though all may be hired back. We are not sure how to handle loans or distributions in this type of scenario. Do you have any advice? Does either, or both, of the above result in a separation of service? Are they then eligible for a distribution? Does that mean in both cases that the loan becomes due and payable, as most of our documents do not allow for repayments after termination?
Client Question: A few Loan Policy questions: 1. What is the definition of "Leave of Absence" regarding loan payment suspensions? Would someone being temporarily laid off count? 2. Under the Loan Policy, would a partial payment be counted as making "any scheduled repayment..." to avoid default, or would it have to be the entire payment? 3. Can a Participant voluntarily stop loan repayments (ask HR to stop loan payment withholdings from their paycheck)?
ASC Response: Numerous questions arise relating to whether a termination of employment or severance from employment has occurred that allows for a plan distribution. As recent industry commentaries indicate, there is no consensus as to the legal status of a layoff, furlough, leave of absence and other events and whether they constitute a termination of employment or severance from employment that allows for a plan distribution. The determination generally relates to whether the employee's common law employment relationship with the employer has ended. This is clearly a factual (and difficult) determination. Some questions that might be asked - Was the employment relationship terminated when he was "laid off"? If someone called the employer and asked if that individual was still employed, would the employer say no? Is the employee still eligible for benefits during the layoff? Is the employer holding a job open for this individual and expecting him/her to come back in a short period of time? Is it a temporary layoff or permanent?
With regard to loans and leaves of absence, a plan may (but is not required to) suspend loans for up to one year for bona fide leaves of absence and for military leave. The regulations do not provide a definition for leave of absence. Generally, a leave of absence is not considered a termination of employment and the participant remains an employee. Industry advocates have asked the IRS to provide relief from the loan default rules for participants affected by the COVID-19 crisis.
We are hoping that the IRS and DOL will provide guidance on these situations. Also, it is likely that Congressional action may address some of these issues. In the meantime, we encourage employers and plan administrators to make good-faith determinations (based on plan terms, loan policies, administrative policies, etc.) on specific situations, be consistent with these interpretations for all plan participants and clearly document the decision-making process.
These FAQs are in response to the numerous plan document and plan administration questions ASC has received from clients relating to issues associated with the COVID-19 outbreak. We will continuously update these FAQs as we address new issues or receive updated information from the Internal Revenue Service (IRS) and the Department of Labor (DOL). Additionally, the information we provide through these FAQs is intended to be accurate, however, many questions present difficult issues. You should consult with legal counsel on specific issues and factual situations.
Safe Harbor Contributions Suspensions
Client Question: I have a QACA Safe Harbor plan that wants to potentially suspend its match. The employer will have to provide a 30-day notice to its employees. During this period, the employer will most likely amend its plan and switch to a discretionary match. Would they have to wait until January 1, 2021 to go back to a QACA Safe Harbor type plan
ASC Response: Good question, especially after the SECURE Act changes. It is clear that under prior guidance including up to and including Notice 2016-16 that you would not be able to start the QACA again until the 1/1/2021 date. The SECURE Act allows an employer to amend a 401(k) plan into a nonelective safe harbor contribution plan after the beginning of the plan year for which the safe harbor rules will apply. The amount of the nonelective safe harbor contribution (either 3% of compensation or 4% of compensation) depends on timing of the amendment. The question becomes, once you have unsafe-harbored a safe harbor plan can you re-safe harbor the plan in that same year? Unfortunately, we have not seen any guidance addressing that exact issue. The conservative and safer approach would be to delay amending back to safe harbor status until 2021.
Client Question: A client that is using our 401(k) prototype wants to know how much management exposure the employer has with regard to the volatile market. A participant makes a request for a disbursement going through the appropriate process. Paperwork falls through the cracks and by the time the request is processed, the participant's account has lost half of its value due to market conditions. Does the delay in processing the withdrawal on a timely manner create any exposure for the employer?
ASC Response: This is really not a prototype issue. What you have laid out is a proper plan administration issue and whether there has been a fiduciary breach in not timely paying out the participant's distribution. Given these facts, if there was an unreasonable delay in making the distribution, the employer may face potential liability for the losses incurred by the Plan participant. Of course, this is a facts and circumstances determination. The plan fiduciaries should assess the reasons for the delayed distribution and amount of liability. Among the factors to consider are whether the plan's established procedures were followed and, if not, why. Another question is who should bear the burden? Is it reasonable to say that the participant should bear the burden for the errors of those administrating the plan? If the employer is liable, it may want to look to its service provider's role in the delay in processing the distribution to determine if it failed its contractual responsibilities. If so, the employer may seek indemnification from the service provider.