Posts

Print Friendly Version Print Friendly Version

Delayed Deposits of Employee Salary Deferrals Due to Covid-19

“In a recent conversation with one of my plan sponsor clients, the business owner said that he had heard it was OK to delay depositing employee salary deferrals to his 401(k) plan because of Covid-19. Can that be true?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Nevada is representative of a common inquiry related to the timely depositing of employee salary deferrals to a 401(k) plan.

Highlights of the Discussion

Under limited circumstances, explained next, it may be possible to delay the deposit of deferrals, but we suggest exercising extreme caution in doing so, and carefully documenting the reasons for the delay. According to new guidance in EBSA Disaster Relief Notice 2020-01,  it may be possible to delay remitting to a plan employee salary deferrals that have been withheld from participants’ pay without sanction only if the delay is due to the Covid-19 outbreak. Moreover, “Employers and service providers must act reasonably, prudently, and in the interest of employees to comply as soon as administratively practicable under the circumstances.”[1]

The Department of Labor (DOL) has strict rules addressing the timing of deferral remission. Generally, plan sponsors of large 401(k) plans (those with 100 or more participants) must deposit deferrals as soon as they can be reasonably segregated from the employers’ assets, but not later than 15 business days following the month the deferrals are withheld from the participants’ pay [DOL Reg. 2510-3-102(a)(1) and (b)(1)].  A safe harbor deadline applies for small plans (those fewer than 100 participants) (i.e., plan sponsors in this case have seven business days following the day on which such amounts were withheld to deposit them to their plans [DOL Reg. 2510-3-102(a)(2)].

EBSA Disaster Relief Notice 2020-01 relaxes the remittance requirements for some employers. Specifically, the notice states:

The Department recognizes that some employers and service providers may not be able to forward participant payments and withholdings to employee pension benefit plans within prescribed timeframes during the period beginning on March 1, 2020, and ending on the 60th day following the announced end of the National Emergency. In such instances, the Department will not – solely on the basis of a failure attributable to the COVID-19 outbreak – take enforcement action with respect to a temporary delay in forwarding such payments or contributions to the plan.

The phrase, “… solely on the basis of a failure attributable to the COVID-19 outbreak,” is narrow. Therefore, if a delay is necessary, while it is still “fresh,” we suggest that a prudent course of action would be to clearly document and provide detail in the plan records (a.k.a., the “fiduciary file”) why the delay was attributable to COVID-19, and how the plan complied as soon as administratively practicable under the circumstances.

Conclusion

The timely deposit of employee salary deferral has always been a top concern of the DOL. While EBSA Disaster Relief Notice 2020-01 provides limited enforcement relief from missed deferral deposit deadlines caused by Covid-19 hurdles, employers and service providers must still act reasonably, prudently, and in the best interest of employees by depositing the deferrals as soon as practicable.

[1] EBSA Disaster Relief Notice 2020-01

© Copyright 2020 Retirement Learning Center, all rights reserved
Print Friendly Version Print Friendly Version

Reporting Coronavirus-Related Distributions

“With the creation of Coronavirus-Related Distributions (CRDs) and the ability to pro rate the taxation and pay the withdrawal back within three years, how will retirement plan and IRA administrators, as well as individuals, report these transactions to the IRS? Won’t it be a big mess?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Washington is representative of a common inquiry related to CRDs.

Highlights of the Discussion

While we do not have definitive reporting guidance yet, we anticipate the IRS’s reporting procedures for CRDs will be similar to those the agency already has in place for “qualified disaster distributions” (QDDs). It seems we’ve been here before.

For CRDs, the IRS will waive the 10% early distribution penalty for the first $100,000 taken from an eligible retirement plan due to Coronavirus. Distribution recipients may pay back the amount within three years (2020, 2021 and 2022); and taxation can be spread over three years. The term ‘‘eligible retirement plan’’ includes an IRA (as well as an IRA-based plan), qualified plan, qualified annuity plan, governmental 457(b) plan or 403(b) plan.

Like CRDs, QDDs, were tax-favored withdrawals and repayments from certain retirement plans for taxpayers who suffered economic losses as a result of disasters like those for Hurricanes Harvey, Irma and Maria, and the California Wildfires. The most recent IRS Publication 976, Disaster Relief and Forms 8915-A, 2016 Qualified Disaster Retirement Plan Distributions and Repayments and 8915-B Qualified 2017 Disaster Retirement Plan Distributions and Repayments and their instructions (Instructions to Form 8915-A and Instructions to Form 8915-B) give us a pretty good idea of what the IRS will expect for CRDs with respect to reporting. No doubt there will be some “tweaks” needed to these materials to encompass CRDs, but at least we know we are not starting from scratch!

Conclusion

When and how much of a CRD a recipient pays back (rolls over) within the next three years will dictate his or her precise reporting protocol. Reporting will not be the same for everyone. It may involve filing amended tax returns, but rest assured there will be a manageable process for plan and IRA administrators, as well as IRA owners and plan participants to account for CRDs.

© Copyright 2020 Retirement Learning Center, all rights reserved