How The CARES Act Is Impacting 401k Plans

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This episode features audio clips from a recent qualified plan educational webinar that Josh hosted with Matthew Eickman, the National Retirement Practice Leader for Prime Capital Investment Advisors & Qualified Plan Advisors. Josh and Jay provide context to the CARES Act content provided by Matthew, particularly around decisions plan sponsors had to make regarding opting in or out of certain CARES Act provisions, as well as discussing special loan provisions offered to plan participants.

This episode dives into the most important tasks that plan sponsors need to take NOW related to the CARES Act, and is a really important listen to any qualified plan decision makers!

Josh is connected to Prime Capital Investment Advisors and Qualified Plan Advisors. His company, Gulf Coast Financial Advisors, is part of their network of independent advisors, which gives him the support of a multi-billion dollar investment company but still provides for independence and ownership of his practice.

Key Takeaways:

A few recordkeepers took an “opt out” approach with the CARES Act. Most took an “opt in” approach. Some varied based on the provisions. All need to walk thru this decision tree: Have we already made an election or been deemed to? If so, what did we elect? If not, do we have a deadline upcoming? If not, do we want to implement one or more CARES Act?
Plan participants may suspend loan repayments for the remainder of 2020. Plan sponsors need to pay close attention to the recordkeeper/TPA instructions, plus ensure accurate communication with employees, including acknowledging what you may not yet know about 2021 and beyond. Important questions include: When will payments restart in 2021? Will participants be making double payments? Will the entire outstanding?
For 180 days following the CARES Act, plan loans are subject to a higher ceiling of $100,000 or 100% of the vested account balance. Plan sponsors need to understand that your plan’s limits on the number of loans is not changed by the CARES Act, and recognize that such a loan would be eligible for the 2020 repayment suspension. They should also consider whether this is necessary and, to the extent not already added, defer the decision until participants need or demand it.
The CARES Act permits a “coronavirus-related distribution” of up to $100,000, with favorable tax treatment, but employers across the country have struggled with this. Some implemented it; some are dead set against it, and some are taking a wait and-see approach. Plan sponsor should anticipate 1099 reporting help from the recordkeeper, and IRS guidance relating to the distribution and potential repayment reporting. A important question will be how will reporting issues work for the distribution and potential repayments?
Eligibility for CARES Act loan provisions and special distribution requires satisfaction of one of the “qualified individual” conditions: 1) Participant diagnosed with COVID-19; 2) Participant’s spouse or dependent diagnosed with COVID-19; or 3) Participant experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, subject to reduced hours, being unable to work due to lack of child care, closing or reducing hours of the individuals business, as a result of COVID-19.
IRS Notice 2020-50 expanded item 3) to include an individual who experiences the adverse financial consequences as a result of: the individual, the individual’s spouse, or a member of the individual’s household having a reduction in pay or self-employment income due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19; the individual’s spouse or a member of the individual’s household experiencing any of the events previously limited to the individual (e.g., being quarantined, being furloughed or laid off, having work hours reduced); or closing or reducing hours of a business owned or operated by the individual’s spouse or member of the individual’s household due to COVID-19.
Plan amendments are not required until the end of the 2022 plan year (at the earliest). Right now, plan sponsors should focus on administrative elections, but also making sure those elections match the amendments that will be adopted later.

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