The CARES Act includes several provisions that affect qualified Employee Benefit Plans. These include:
1. A new in-service distribution option, called a Coronavirus-Related Distribution (CRD). The CRD is optional (plan sponsors may or may not elect to adopt this provision) and it allows participants who meet specific conditions to take a CRD of up to $100,000 from eligible retirement plans (401(k), 403(b), governmental 457(b)) or an IRA without incurring a 10% early withdrawal penalty. CRD’s are available to a participant who was diagnosed or whose spouse or dependent was diagnosed with COVID-19, or to a participant (referred to as a “qualified individual”) who has experienced adverse financial consequences as a result of a) being quarantined; b) job loss or work hour reductions; c) being unable to work due to a lack of childcare; or d) closure or reduced operating hours of an owned or operated business. Eligible distributions can be taken up to December 31, 2020. CRD’s are permitted to be repaid to the plan over a three-year period. These repayments will be treated as tax free rollovers into the participant’s account. The plan administrator may rely on a participant’s self-certification that the participant satisfies one of the conditions for a CRD.
2. Expanded loan provisions. If a plan sponsor elects to adopt this provision, participants who meet the conditions specified under the CRD rules, may borrow up to $100,000 or 100% of their vested balance from qualified plans (an increase from $50,000 or 50% previously allowed). This provision only applies to loans made during the period from March 27, 2020 to September 23, 2020. In addition, qualified individuals with loan repayments due between March 27, 2020, and December 31, 2020, can delay their loan repayments for up to one year. During this time, interest continues to accrue. Plan sponsors may immediately implement the CRD and expanded loan provisions. The deadline to amend plan documents is the last day of the plan year beginning on or after January 1, 2022.
On June 19th, the IRS issued Notice 2020-50, Guidance for Coronavirus-Related Distributions and Loans from Retirement Plans Under the CARES Act. The notice expands the definition of who is a qualified individual to take into account additional factors such as reductions in pay, rescissions of job offers, and delayed start dates with respect to an individual, as well as adverse financial consequences to an individual arising from the impact of the COVID-19 on the individual’s spouse or household member.
3. Suspension of Required Minimum Distributions (RMDs) for 2020. RMDs for 401(k), 403(b), 457(b) plans, and traditional IRAs are temporarily suspended for 2020. In cases where a participant or IRA holder already received an RMD during 2020, they can roll that amount over or roll it back into a qualified plan or IRA. On June 23rd, the IRS issued Notice 2020–51. The notice answers questions relating to the waiver of 2020 RMDs and provides a sample plan amendment that, if adopted, would provide participants a choice whether to receive waived RMDs and certain related payments. The notice also provides transition relief for plan administrators and payors in connection with the change in required beginning date for RMDs under the SECURE Act.
4. Relaxed Minimum Funding Rules for Single-Employer Defined Benefit Plans. The CARES Act defers the due date for all contributions (including quarterly contributions) originally due in 2020 to January 1, 2021. The amount of any deferred contributions is increased by interest accruing for the period between the original due date for the contribution and the payment date, at the effective rate of interest for the plan for the plan year which includes such payment date.
In addition to the changes under the CARES Act, plan sponsors and plan participants face economic and other challenges brought on by the COVID-19 pandemic that may impact Employee Benefit Plan activity and operations. These could include:
1. Delayed, reduced, or suspended plan contributions
2. Participant loan collectability problems
3. Plan terminations or partial plan terminations due to workforce downsizing
4. Changes in business processes and internal controls
5. Financial deterioration of the plan sponsor, resulting in short-term liquidity and long-term solvency problems
6. Heightened going concern risks
7. Declines in the fair values of investments
8. Decreased reliability of assumptions used in valuations and other estimates
Plan sponsors should be aware of the impact these changes and challenges could have on the audit process, including:
1. As the number of distributions and distribution amounts may increase, your auditors may pull larger samples of loans and distributions.
2. If your organization implemented new procedures and controls due to the pandemic, your auditors will likely review them. They will also want to verify that the controls you relied on prior to the pandemic are still operating.
3. Expect your auditors to ask more questions and to take a bit more time this year.
4. You may be requested to provide more financial statement disclosures this year than what you have in the past. These disclosures could include a) comments on market fluctuations; b) significant changes to the plan; or c) a going concern disclosure, which contains information about your organization’s ability to operate in the future.
Below are some actions you can take now to prepare for this year’s employee benefit plan audit:
1. Have a thorough understanding of your organization’s controls and processes and what has changed, and be prepared to convey the changes to your auditors. This is an ideal time to review your organization’s employee benefit plan procedures and modify them as needed.
2. Make sure there is someone at your organization with access to the plan and knowledge of the plan’s processes that the auditors can contact, with any questions or concerns.
3. Document, document, and document! Maintain documentation of any changes to procedures, personnel involved, controls and documentation used for your employee benefit plan. In addition to all of your plan documents, your auditors will also need access to human resources, payroll, and financial information concerning plan participants and plan administration.
4. Make sure that only appropriate personnel can access pertinent materials. Always keep track of which employees have access to sites used for communication with your plan’s service providers. Make sure to also deactivate former employees’ accounts and access to sites to help reduce the risks of fraud and identity theft.
5. Your auditors will be in touch about scheduling and logistics of the audit well in advance, given the changes and restrictions brought about by COVID-19. This will ensure the audit goes smoothly.
If you have any questions regarding the changes brought about COVID-19 with respect to your employee benefit plan and audit this year, please contact your audit team.