GJC Advisor – Employee Benefit Plans Update Spring 2021

The Consolidated Appropriations Act, 2021 (CAA), which was enacted on December 27, 2020, is mostly known for the $900 billion it provided in additional stimulus funding for pandemic relief. Additionally, the law contains several useful provisions for retirement plans, including non-COVID disaster emergency relief, multiemployer and defined benefit plan changes, and updates to partial plan terminations. All of these provisions are discretionary, and have very narrow applicability. Regardless, plan sponsors should take the time to understand the relevant parts of the law and see whether the various provisions might benefit their organizations and plan participants.

While nearly everyone has been affected by the COVID-19 pandemic, the economic impact has been especially acute for women. In addition to the disproportionate number of women who were furloughed or laid off, many women faced additional financial stress from needing to take time off to care for children, elderly parents, or other family members.

This is more than just an employee-morale issue for employers. Stress about financial issues can have a meaningful impact on worker productivity. A Retirement Advisor Council report found that about half of employees who are distracted by their finances spend at least three work hours a week dealing with issues related to their personal finances.

Now that vaccines are being distributed and more people are returning to work, plan sponsors have an opportunity to take a look at financial wellness programs to help their female employees deal with the myriad financial burdens set upon them by the pandemic.

The Coronavirus Aid, Relief and Economic Security (CARES) Act allowed plan sponsors to relax loan and distribution rules in 2020, giving participants greater access to funds during the pandemic. These provisions were implemented to provide relief as many employees do not have adequate short-term savings. Employee Benefit Research Institute (EBRI) has found that only one in five families has at least three months of liquid savings. Layoffs, furloughs and other circumstances caused by the pandemic have left many workers struggling financially, so naturally, many looked to their retirement accounts for relief. While this access has been a useful tool for many financially strained Americans, such loans and withdrawals could inflict long-term damage on their progress toward a successful retirement.

Employers have an important role to play in helping to ensure that the flexibility offered by the CARES Act is used to alleviate workers’ short-term financial strains while minimizing the impact on their overall retirement strategy. Employers can do their part by carefully communicating how these withdrawals affect the amount that will be available to use in retirement and providing resources to assist in developing strategies to recuperate those funds.

The Coronavirus Aid, Relief and Economic Security (CARES) Act was a rapid response by the federal government to help businesses and employees cope with the economic issues caused by the pandemic. Many aspects of the wide-range law make significant changes affecting employer-sponsored retirement plans and their participants.

Since Congress passed the CARES Act in March 2020, plan sponsors have asked numerous questions about the law’s impact on plans and participants. Below is a list of some of the most common questions plan sponsors face, along with our brief answers.

1. Did COVID-19 furloughs create partial plan terminations?

If an employer furloughed a significant portion of its workforce because of COVID-19 or the resulting economic downturn, it is possible that those furloughs triggered a partial plan termination. A partial plan termination happens generally when 20% or more of participants terminate employment without full vesting during a particular year. Partial terminations can occur in connection with a significant corporate event such as a plant closing, or as a result of general employee turnover due to adverse economic conditions or other reasons that are not within the employer’s control. A furlough is an involuntary, unpaid temporary leave, but the individual is still considered an employee. A furloughed employee would generally not be considered in the calculation for a partial plan termination as long as the employee returns to work within the plan year. Determining whether a partial plan termination occurred requires plan sponsors to calculate the turnover rate as well as take a careful look at the facts and circumstances surrounding the action(s). There is no one perfect formula that fits all situations.

Plan sponsors now have until March 31, 2021 to return the size of their workforces to a level that would avoid a partial plan termination.

During the first year of the COVID-19 pandemic, Congress provided plan sponsors with a broad toolkit to help employees access retirement assets and manage loan repayments. However, many of the provisions associated with retirement plan loans in the Coronavirus Aid, Relief and Economic Security (CARES) Act have now expired. Plan sponsors should work with their service providers to ensure that loans are being administered accordingly—or take advantage of federal self-correcting programs to get retirement plan loans back on track.

Review of CARES Act Loan Provisions

The CARES Act allowed employers to increase the amount participants could borrow from their 401(k), 403(b) or 457 plans. Previously, the limit was the lesser of $50,000 or 50% of the vested balance, but during the period March 27, 2020 to September 22, 2020, participants with a valid COVID-19-related reason could borrow the lesser of $100,000 or 100% of the vested balance.

A second provision allowed participants to suspend repayments on any outstanding plan loan between March 27 and December 31, 2020 if they were affected by the pandemic. The CARES Act also extended the repayment term for loans (usually five years) by an additional year. Repayment schedules needed to be re-amortized (including interest incurred during the suspension of repayments) and resumed in January 2021.

When workers change jobs and relocate, plan sponsors face several challenges, including locating former employees who have left funds in a qualified retirement plan and failed to keep their contact information current. The scope of the missing participants problem is enormous: A 2018 survey found that one out of every five job changes results in a missing participant. Now that the COVID-19 pandemic has resulted in economic and physical dislocation of millions of employees, the issue has taken on even greater urgency: Some 5% of U.S. adults relocated due to the financial pressures of the pandemic, according to a poll by the Pew Research Center.

In early 2021, the Department of Labor (DOL) issued a three-part package of sub-regulatory guidance related to missing participants that addresses the fiduciary responsibilities of plan sponsors related to these plan participants and beneficiaries.

DOL’s Recommended Best Practices for Missing Participants

The DOL’s “Missing Participants — Best Practices for Pension Plans” describes a range of steps that retirement plan fiduciaries should consider to locate missing or nonresponsive participants. Plan fiduciaries should determine which practices will be most effective for the plan’s specific population.

Efforts to keep up with the myriad of challenges that retirement plan sponsors faced in 2020 may have caused some to overlook significant changes related to hardship distributions that were enacted before the onset of the COVID-19 pandemic.

These changes are designed to make it easier for participants to access funds from their 401(k) plans if they are experiencing significant financial hardship, and several changes apply to 403(b) plans as well. Some of these provisions were optional from 2018 to 2019 but became mandatory in 2020 for plan sponsors that chose to allow hardship distributions.

Now is the time for plan sponsors to examine whether they are complying with these changes in how they administer their plans and whether their plan documents accurately reflect these changes.

Background on Hardship Distribution Rule Changes

Plans are allowed—but not required—to offer taxable, in-service hardship distributions to participants who demonstrate an “immediate and heavy financial need” that could be satisfied only by taking money from their retirement accounts. In the past, that need was determined by facts and circumstances and certain safe harbors built into the law.

Employee benefit plan sponsors and their auditing firms need to begin preparing for the adoption of Statement on Auditing Standards No. 136 (SAS 136), Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA (Employee Retirement Income Security Act of 1974). This auditing standard was enacted by the American Institute of Certified Public Accountants (AICPA), and was effective for years ending after December 15, 2020. While the AICPA delayed the effective date by one year due to the COVID-19 pandemic, auditing firms may choose to adopt the standard on the original effective date. Plan sponsors will need to take the time to understand SAS 136 and its effect on the audit process.

Goals of SAS 136

In 2015, the Department of Labor’s Employee Benefits Security Administration (EBSA) examined the quality of audit work done on employee benefit plans by independent qualified public accountants. SAS 136 is the AICPA’s effort to address some of the issues found in the EBSA examinations.

The goal of SAS 136 is to enhance the quality of audits of ERISA plans by prescribing certain procedures that are required to be performed in the audit. The auditing standard also looks to add transparency to the nature and scope of ERISA benefit plan audits as presented in the auditor’s report.

As part of the overall movement toward financial wellness, Congress and the Department of Labor (DOL) are focused on giving retirees more visibility into how retirement savings translate into lifetime income. In the Setting Every Community Up for Retirement (SECURE) Act of 2019, Congress required an annual lifetime income disclosure for ERISA defined contribution plans. In August 2020, the DOL issued an interim final rule (IFR) that implements this lifetime income disclosure requirement and provides specifics on what plan sponsors must do to follow it.

The DOL’s IFR lays out the specific assumptions that are required for calculating the annuity amounts and provides model language that plan sponsors can use to describe the calculations. Plan sponsors are allowed to go beyond these baseline requirements, but they need to understand that doing so creates potential liability.