EMPLOYEE BENEFIT PLAN RESOURCES
Newsletter by Hawkins Ash CPAs
In this Edition
May 21, 2020

The CARES Act’s Impact on Employee Benefit Plans

Families First Coronavirus Response Act and Retirement Plans

Key Changes for Employers Related to the SECURE Act
The CARES Act’s Impact on Employee Benefit Plans

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed and became immediately effective. What does this mean for employee benefit plans? The major changes are summarized here.

The CARES Act created an option for qualified individuals to take up to $100,000 as a distribution during 2020 from their plan balances.

  • Qualified individuals include participants, their spouses or immediate dependents that have been diagnosed with the coronavirus. Also included in the qualified group are participants who experience adverse financial consequences as a result of quarantine, furlough, layoff, reduced hours, inability to work due to lack of childcare and closing of a business the individual owned or operated.
  • Any 10 percent early withdrawal penalty that participants under age 59 ½ would have incurred has been waived, and participants have the option to either pay the tax all in one year or spread out the tax owed across three years. These distributions will be self-certified by participants per the law. Amendments to plan documents to allow for these distributions must be completed by Dec. 31, 2022, for calendar year-end plans.
  • Offering these distributions is not mandatory; it is the plan sponsor’s choice. The plan sponsor also has the choice to turn on the coronavirus related distributions for lessor amounts. (For example, a plan sponsor could choose to allow the distributions up to $50,000 instead of $100,000.)

Another impact on distributions relates to required minimum distributions (RMDs).

  • All RMDs for 2020 were waived.
  • Employees who have already taken an RMD during 2020 are allowed to roll it back into their plan as long as it is within 60 days of the original distribution. It is important to note that if an employee is taking RMDs as monthly installments, only one of the monthly distributions can be rolled back into the plan.

The CARES Act also created new plan loan provisions.

  • These provisions are available to qualified individuals as defined above. Qualified individuals are allowed to take loans for the lessor of 100 percent of their vested balances, or $100,000 (increased from 50 percent of their vested balances, or $50,000).
  • This increased loan availability is only for 180 days after the act was placed in effect.

Loan payment requirements were also changed.

  • If someone had a loan as of March 27, 2020, or if a new loan is entered into during 2020, no payments are required.
  • Participants can choose to continue to make payments if they do not want to defer them.
  • If payments are delayed, interest will still accrue on the loan balances during 2020 and will be added to the total amount due. This will result in higher loan payments for participants going forward, as the loans will be re-amortized beginning Jan. 1, 2021.
  • The loan provision changes are also optional for plan sponsors.

Finally, for defined benefit plans, the CARES Act has included an option to delay minimum required funding until Jan. 1, 2021.

  • They will also be allowed the use of the 2019 Adjusted Funding Target Attained Percentage again for the 2020 plan year end.

So what should be done now? Any changes that are made to plans should be communicated to participants. Plan sponsors should discuss with their third-party administrators and auditors what these changes might mean for the 2020 plan year, including getting the ball rolling on the required plan amendments and requesting suggestions for what documentation to keep to make the 2020 plan audits as smooth as possible.

Changes in legislation are frequently occurring, so keep informed, and keep safe and well.

Contact: Rachel Burrow, CPA
Direct: 608.793.3114
Email: rburrow@hawkinsashcpas.com
Families First Coronavirus Response Act and Retirement Plans

The Families First Coronavirus Response Act (FFCRA) requires certain employers to provide employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19. The paid sick leave and expanded family and medical leave provisions of the FFCRA apply to certain public employers and private employers with fewer than 500 employees. However, small businesses with fewer than 50 employees may qualify for exemption from the requirement to provide leave due to school closings or childcare unavailability if the leave requirements would jeopardize the viability of the business as a going concern.

Under the FFCRA, an employee qualifies for paid sick time if the employee is unable to work (or unable to work remotely) due to a need for leave because the employee:

a.) Is subject to a federal, state or local quarantine or isolation order related to COVID-19,

b.) Has been advised by a health care provider to self-quarantine related to COVID-19,

c.) Is experiencing COVID-19 symptoms and is seeking a medical diagnosis,

d.) Is caring for an individual subject to an order described in (a) or self-quarantine as described in (b),

e.) Is caring for a child whose school or place of care is closed (or child care provider is unavailable) for reasons related to COVID-19, or

f.) Is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services, in consultation with the Secretaries of Labor and Treasury.

Duration of Leave

For reasons (a) through (d) and (f), the FFCRA provides a full-time employee 80 hours of leave. A part-time employee is eligible for the number of hours of leave that the employee works on average during a two-week period.

For reason (e), a full-time employee is eligible for up to 12 weeks of leave at 40 hours a week. A part-time employee is eligible for leave for the number of hours that the employee is normally scheduled to work during that period.

Calculation of Pay

For reasons (a) through (c), employees taking leave are entitled to pay at either their regular rate or the applicable minimum wage (whichever is higher) up to $511 per day and $5,110 in the aggregate (during a 2-week period).

For reasons (d) and (f), employees taking leave are entitled to pay at two-thirds their regular rate or two-thirds the applicable minimum wage (whichever is higher) up to $200 per day and $2,000 in the aggregate (during a 2-week period).

For reason (e), employees taking leave are entitled to pay at two-thirds their regular rate or two-thirds the applicable minimum wage (whichever is higher) up to $200 per day and $12,000 in the aggregate (during a 12-week period).

FFCRA Pay and Retirement Plans

Can employees make salary reduction contributions from the amounts paid as qualified leave wages for their employer sponsored health plan, a 401(k) or other retirement plan, or any other benefits?

The FFCRA does not distinguish qualified leave wages from other wages an employee may receive from the employee’s standpoint as a taxpayer; thus, the same rules that generally apply to an employee’s regular wages or compensation would apply. To the extent that an employee has a salary reduction agreement in place with an eligible employer, the FFCRA does not include any provisions that explicitly prohibit taking salary reduction contributions for any plan from qualified sick leave wages or qualified family leave wages.

Should eligible employers withhold federal employment taxes on qualified leave wage paid to employees?

Yes. Qualified leave wages are wages subject to withholding of federal income tax and the employee’s share of Social Security and Medicare taxes. Qualified leave wages are also considered wages for purposes of other benefits that the eligible employer provides, such as contributions to 401(k) plans.

Contact: Charlie Wendlandt, CPA
Direct: 715.384.1986
Email: cwendlandt@hawkinsashcpas.com
Key Changes for Employers Related to the SECURE Act

The topics on everyone’s mind these days seem to be the coronavirus pandemic and the various related acts that were put into place to provide relief to business operations; however, there is another act that should be kept in mind right now.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act (Act) is in effect for plan years that begin after Dec. 31, 2019, and is one of the most significant retirement reform packages in more than a decade. This act affects individuals, employers and plan administrators through changes made to the IRC (Internal Revenue Code) and ERISA. Some of the key highlights affecting employers and plan administrations are as follows.

Pooled Employer Plans

With the SECURE Act comes changes for multiple employer plans (MEPs). MEPs allow businesses to essentially team up to enable employers to provide their employees with a defined contribution plan (such as a 401(k) plan). By pooling smaller employers together, the employers are able to benefit from lower-cost plans similar to what a larger employer is able to offer while cutting out some of the burden of having multiple plans and outside administrators along with lightening some of the fiduciary duties.

Historically, a MEP has required the participating employers to have some type of relationship or commonality; however, this Act now allows more options to enable participation in a MEP. The Act created pooled employer plans (PEPs) that will allow a group of unrelated employers to be administered by one designated pooled plan provider (PPP)*. The PPP selected by the employer will be the plan administrator and the plan fiduciary; however, the employer will still be ultimately responsible for monitoring the PPP. With the economies of scale that these employers gain through having common plan administration, they also may be able to file a consolidated Form 5500 that can also result in additional cost savings for a small to mid-size employer.

In the past, MEPs had a “one bad apple” rule that was riskier for employers in that if one of the participating employers had a compliance or regulatory issue (such as failing to make timely contributions to the plan), all of the employers were at risk of the MEP losing its tax-exempt status. The PPP now eliminates this rule, provided that certain criteria are met.

*Not to be confused with the Paycheck Protection Program (PPP).

Deadline Change for Plan Adoption

Typically, most retirement plans were required to be set up during the tax year in which the plan was to take effect. The Act now extends the adoption deadline to as late as the due date of the employer’s tax return (which would include any extensions filed). This looser restriction will give employers more flexibility in making contributions to help them reduce plan sponsor tax liabilities.

Penalty Increases

Employee benefit plans always have been tightly regulated, and compliance is of the utmost importance with so many employee funds being accounted for, especially in today’s climate. The Act now increases penalties even more for plans failing to comply with filing requirements:

  • Failure to timely file a Form 5500 is $250 per day up to a maximum of $150,000 (up from the previous amount of $25 per day and maximum of $15,000). In addition to this late filing penalty for Form 5500, there is also an additional potential charge by the Department of Labor (DOL) of up to $2,194 per day that remains unchanged by the SECURE Act.
  • Failure to file Form 8955-SSA is $10 per participant per day, not to exceed $50,000 (up from the previous amount of $1 per participant and maximum of $1,000).
  • Failure to provide required withholding notices (such as income tax withholding notices) can be assessed up to $100 for each failure, not to exceed $50,000 for the calendar year (up from $10 for each failure with the maximum of $5,000).

Annuities

Annuity options are designed to help retirees spread out future income for the expected duration of their lives. Oftentimes, employers are hesitant to offer these options for fear that calculations could be wrong or the risk of liability they could face if the annuity provider runs into financial issues. The SECURE Act now provides employers protection from this liability as long as the provider they choose meets certain criteria. The Act mandates employers to provide plan participants with a statement at least annually that would show participants what their estimated monthly payments would be if their total account balance were to be paid out as an annuity.

Safe Harbor Plans

Prior to the SECURE Act, employers with safe harbor plans had to give employees notice prior to the beginning of the plan year of qualified non-elective contributions (contributions an employer makes that is separate than a matching contribution) of at least 3 percent. The Act eliminates this notice requirement.

The Act also relaxed non-elective safe harbor amendment guidelines. If your plan is not a safe harbor plan, you can amend it to include the safe harbor non-elective option any time during the plan year up to 30 days before the plan year end. A current safe harbor non-elective plan can be amended retroactively by the end of the following plan year if they choose to increase the safe harbor non-elective contribution from 3 percent to 4 percent, provided certain conditions are met.

Auto-Enrollment

For plans with Qualified Automatic Contribution Arrangements (QACAs), the maximum limit of the default percentage was raised from 10 percent to 15 percent of compensation (outside of the first year of participation) to encourage higher retirement savings of participants.

Expanded Employee Participation

A typical 401(k) plan oftentimes excludes participation from employees who work less than 1,000 hours per year. The SECURE Act will now require employers to include those that worked at least 500 hours in three consecutive years and are at least age 21 at the end of the three-year period (beginning on Jan. 1, 2021).

As you can see, the SECURE Act is very involved. There are numerous other provisions within the Act that affect individuals, and the above is just intended to provide you with a few of the larger changes that affect employers. Be sure to work with your third-party administrator to fully understand the options available to you.

Contact: Erica Knerzer, CPA
Direct: 608.793.3113
Email: eknerzer@hawkinsashcpas.com
More Resources from CPA-HQ
FFCRA: Paid Leave Payroll Calculator

We have developed an FFCRA Calculator to help you determine the 941 payroll tax credit and/or advance from the IRS (Form 7200).
COVID-19: The Employee Retention Credit Explained

Learn how it's calculated, which wages qualify, how businesses can expect to receive their credit and more.
FFCRA Notice

According to the U.S. Department of Labor Wage and Hour Division, each covered employer must post a notice of the FFCRA requirements in a conspicuous place on its premises.
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