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CARES Act “Clean-Up in Aisle 9”

By W. Andrew Larson, CPC

Ah yes, how quickly we forget. Remember the Coronavirus Aid, Relief, and Economic Security (CARES) Act hurriedly passed by Congress and signed by President Trump on March 27th of this year?  Then the rush was on as plan sponsors incorporated the seeming plethora of participant-friendly, COVID-related provisions into their qualified plans. And, in many cases, even if a plan sponsor did not add the COVID-related features themselves, the plan’s record keepers did so through negative response defaults. The upshot is many plans have incorporated the COVID-related provisions− so now what?

In contrast to the rushed decisions of the early COVID days, let’s step back and take the time to assess these provisions before the close of the year. Such an assessment can ensure the changes are administered correctly and coordinated between internal staff and service providers. Lastly, the changes need to be communicated to participants and documented in the plan’s records to insure the conforming amendments are done accurately.

To start, let’s revisit the CARES Act’s COVID-related provisions before we commence the CARES Act “clean-up in aisle 9.”

The CARES Act permitted plan sponsors to temporarily liberalize distribution and loan options for participants impacted by COVID-19. To take advantage of these features participants self-certify that they, or a family member, were impacted by COVID-19. Plan sponsors can rely on the self-certifications without additional inquiry.

The CARES Act permitted plan sponsors to implement COVID-related distributions (CRDs) of up to $100,000 from qualified plans, 403(b)s, simplified employee pension (SEP), savings incentive match plan for employees (SIMPLEs) and IRAs. Again, as noted above, a participant self-certifies he or she  qualifies for a CRD. CRDs have unique rules relating to taxation, withholding and rollovers. Specifically, CRDs need not be fully taxed in 2020. Rather, the individual may elect to spread the taxable income over three years, respectively. Next, the mandatory 20 percent withholding on eligible rollover distributions from qualified plans is waived. Lastly, the participant has a three-year window in which he or she may re-roll the CRD back into a qualified arrangement.

A second key provision of the CARES Act dealt with plan loans. Under the Act, the plan loan limitation was temporarily increased to the lessor of 100 percent of a participant’s account balance or $100,000. In addition, loan repayments can be temporarily suspended.

Okay, the next step for plan sponsors and committees is determining exactly which of the CARES Act provisions they affirmatively adopted and which were defaulted to by the record keeper. What did the committee decide to do? What was the record keeper told? What were the participants told? Did the record keeper notify the plan sponsor of CRD-related defaults that were implemented automatically? Clear documentation of the decisions or defaults is essential in order to ensure the plan is operated accordingly.  Once we’ve ascertained which COVID-related provisions apply, the next step is clearly documenting the decisions. Plan documents need not be amended until the end of the 2022 plan year and memories are often short. Therefore, we urge good documentation now of the precise decisions made so when formal amendments happen they are accurate. The Retirement Learning Center has a handy dandy worksheet that can help capture COVID-related decisions for the records. The worksheet can be found at CARES Act Pre-Amendment Checklist.

Once we have identified the CARES Act-related plan decisions, it is then time to ensure the plan’s stakeholders are aware of the decisions and to verify the plan operations are consistent with these decisions. Has there been communication with the record keeper to confirm it is aware of the elected COVID-related provisions? Is the TPA aware of the new provisions? Are the benefits and HR staff members clear regarding the elections and the implications for the participants? What communications have gone out or should go out to plan participants regarding these changes?

All of these questions should be asked and the responses documented in the plan’s records. Things were moving pretty fast earlier in the year. Let’s not assume everyone “got the memo.” A modest effort now in terms of a CARES Act “clean-up in aisle 9” will serve to save much time and effort when the conforming plan amendments are required to be executed.

 

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