The Rosenbaum Law Firm P.C. Blog

With the CARES Act and increased loan amounts and an opportunity for distributions from the early distribution penalty, it’s important for you as a plan sponsor to contact participants about these new provisions if you decided to opt-in and allow them.

Whether it’s you or your third-party administrator (TPA), your participants must know about these avenues because they won’t use them if they don’t know about them. There might be a lot of participants hurting for money right now and they need to know that they may have access to their retirement money.

Your third-party administrator (TPA) might contact you, regarding the coronavirus distribution that is free from the early distribution penalty added by the CARES Act. You have the right, whether to offer it or not.

While the hardship distributions are limited to certain circumstances, the coronavirus distribution allows participants to invade their account balances for any costs related to a diagnosis from Coronavirus or job furlough or termination.

While I don’t like the leakage of retirement plan assets and participants invading retirement assets for today’s needs, I always believe that it’s their money and this pandemic is a once in a lifetime financial catastrophe for millions of Americas. We also don’t understand every participant’s financial standing even if they are still gainfully employed.

Don’t be a Scrooge and allow them access to their money.

The fact is that sometimes, bad things happen to good people. That can be said about retirement plans and the good plan sponsors and providers who do their job. No matter how great a job they do, the threat of potential liability is always there.

No matter how a plan sponsor takes of their fiduciary responsibility and no matter how professional a plan provider is won’t preclude someone from suing them.

Just because a plan participant doesn’t really have a case against a plan sponsor or a plan provider that is doing their job., doesn’t mean they can’t sue. Competence doesn’t preclude frivolous lawsuit or litigation that has very little merit. Competence will only mean that there will likely be no liability, just the headache of a lawsuit.

I know a fiduciary who was sued because the previous plan fiduciary stole money the year before. These things happen because sometimes when someone hires an overly ambitious litigator, people who get sued when they do nothing wrong.

We can talk about how plan sponsors and providers can minimize their potential liability, but they can never eliminate the threat of litigation.

Times are tough, I’m not going to sugarcoat it. Just this past week, two friends I know lost their fathers to COVID-19. As I write this, 10 million people have filed for unemployment. We don’t know how many people in this country will die from it, most experts peg that figure near 100,000.

As dark as things are, keep things in perspective. This isn’t the Depression. This isn’t World War II. This isn’t the Spanish Influenza. It will get worse before it gets better, but we will get through this.

Having experienced two meltdowns in the market in the past 22 years, I feel that this Coronavirus pandemic will have a greater negative impact on the retirement plan industry. Because unemployment rates could hover at a 20-25% clip.

History has shown when times are rough in the economy, plan sponsors will cut back on employer contributions. That’s just common sense.

My latest newsletter for plan providers can be found here.

My latest article for JDSupra.com can be found here.

As the turd in the punch bowl as I affectionately call myself, I am a little too frank on what is going on in the 401(k) industry.

The Coronavirus pandemic is something that hasn’t been seen in this country, probably since World War II. Right now, we don’t know how many people will lose their jobs or be furloughed during this time. While I’m glad that distributions to participants negatively impacted by Coronavirus won’t get the early distribution penalty (for those under 59 ½), the inevitable leakage for retirement plans isn’t good for participants and for plan providers.

Plan participants will lose out because they will invade their retirement savings for money they need today and they will do so after the market has gone down from 25-40% (depending on when they get their distribution).

The 401(k) industry is going to get hurt by this because it’s a business dependent on plan asset size and leakage through hardship distributions and termination distributions will negatively impact the amount of fees that many providers take.

This is the reality we live in. People negatively impacted by this pandemic need relief, but many in the 401(k) industry will pay a price for it with reduced fees because of a market downturn and leakage through distributions. Participants who need the money now, aren’t going to doing better.

With so many layoffs and furloughs thanks to the Coronavirus Pandemic, plan sponsors don’t have the cash that they did before.

If you have plan sponsor clients with safe harbor 401(k) contribution, stated matching contributions, or required minimum funding contributions under a pension plan now is the time to have the discussion with them before it’s too late and they end up paying more in contributions that they may not be able to afford.

Being pro-active with them will allow you to look good in their eyes and allow them to avoid making contributions that they can’t afford.

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act (the “Act”) into law with substantive retirement plan changes. 

Among the changes:

Distribution free from the early distribution penalty.

Coronavirus-related distributions that don’t exceed $100,000 won’t be subject to the 10% early distribution penalty under Code Section 72(t). The early distribution penalty won’t attach to any distribution from a qualified plan that is made on or after January 1, 2020, and before December 31, 2020, to an individual participant who is one of the following:

The plan administrator just has to rely on the affected participant’s certification that he/she falls under this exception to the early distribution penalty. Tax on the distribution can be spread pro-rata over three years. The individual has an opportunity to repay the coronavirus distribution to the plan over the next three-year period which begins on the date following the distribution.

Plan Loans. The CARES Act expands access to plan loans for “qualifying individuals,” a group defined to include only those individuals who qualify for a Coronavirus-Related Distribution (described above). The maximum loan that can be taken is increased to the lesser of $100,000 or 100% of an individual’s vested account balance. This Coronavirus related limit is double the current limit under the law (which is the lesser of $50,000 or 50% of an individual’s vested account balance.) Also, affected individuals with outstanding loan balances on or after the date of enactment of CARES ACT may be allowed to delay loan repayments for up to one year regardless of the five-year repayment period. So that means that future payments will be adjusted to reflect interest accrued for the period of delay and the term of the length of the loan will be extended.

Minimum Distributions Waived. The required minimum distribution requirements are waived for distributions that should have been made in 2020 for a required beginning date that occurs in 2020.

Relief for pension plans. Minimum contributions to single-employer plans which would be due in 2020 shall be due (plus accrued interest) January 1, 2021.

Student Loan Relief. The CARES Act will allow employees to exclude up to $5,250 in employer-paid student loan principal and interest from income in 2020. Employers can make the payments directly to an employee or the lender under an educational assistance program established by the employer under Code Section 127. Thus provision applies to student loan payments made before January 1, 2021.

Plan Amendments. Plans don’t have to be amended until the last day of the first plan year commencing on or after January 1, 2022.