Many plan sponsors have questions about how the COVID-19 pandemic will affect their retirement plans, from changing or suspending employer contributions, to laying off or furloughing employees. Here are some common questions and answers to help employers navigate current challenges:Q1: Can a plan sponsor stop or change discretionary matching or profit sharing contributions mid-year?
A1: Plan sponsors are allowed to change or suspend discretionary matching contributions mid-year. Generally, adequate notice to participants is required, so check with your third party administrator (TPA) or record keeper to initiate the process.
Audit considerations: Document all changes in plan operations and effective dates - in a Board resolution, committee meeting minutes, amendment, or memo.
Q2: Can a plan sponsor stop or change safe harbor matching contributions mid-year?
A2: Safe harbor rules impose limitations on changing those contributions. The plan may be able to change or stop the contributions, but it will depend on several factors, including the provisions in your plan document and the ability to pass certain compliance tests. Contact your TPA or record keeper to analyze your plan’s ability to change its safe harbor contributions.
Audit considerations: Document all changes in plan operations and effective dates - in a Board resolution, committee meeting minutes, amendment, or memo.
Q3: What is the impact on the plan if employees are laid off, furloughed, or take a leave of absence?
A3: Generally, when 20% or more of plan participants have been laid off due to a triggering event (such as a pandemic and severe economic slowdown), this triggers a partial plan termination (PPT). When this occurs, all affected participants (any participant who terminated service during the period) become 100% vested in their plan accounts. Sponsors will need to monitor the number of employees who are laid off throughout the year, and contact their TPA or ERISA counsel for a determination if they believe a PPT has occurred. Because a PPT can occur over time, some participants may have taken distributions earlier in the year and forfeited unvested account balances. If it’s later determined that a PPT occurred, those forfeited account balances will need to be reinstated and distributed. For this reason, sponsors should not “spend” forfeited account balances if there is a possibility of a PPT. Note: furloughed employees or those taking a leave of absence are not included in the count, as they continue to be an employee of the sponsor and do not have an applicable termination date. Consult your plan document for rules on breaks in service and when employees remain eligible or become ineligible to participate in the Plan.
Audit considerations: Provide a determination of whether the plan has incurred a PPT prior to the audit, including an effective date for when participants’ accounts became 100% vested. Be sure to track accurate demographic data, including termination dates, and dates leaves or furloughs began. Do NOT destroy personnel files or I9s of terminated employees! Such information is needed by auditors, and should be maintained as long as an employee has an account in the plan. Continue to follow the plan’s definition of eligible compensation with final paychecks: Regular wages earned by the employee prior to termination are generally included (do not turn off ALL deductions); severance pay (income not earned with regular service, but given due to termination) is generally excluded; PTO, vacation, sick pay, stock compensation, and other non-standard wages – follow your plan document definition.
Q4: If a plan sponsor makes the decision to terminate their plan, what is the process and how does this affect Form 5500 and the audit?
A4: Plan sponsors should contact their TPA or record keeper to initiate a plan termination. Generally, an amendment is required and the plan should be currently compliant with its documented provisions and legal regulations. Upon termination, all participants’ accounts become 100% vested. Plan management will need to start the process to distribute all assets to participants in accordance with the plan’s termination provisions. Form 5500 is required to be filed for each plan year in which there are assets at the beginning of the year. When all assets have been distributed, there may be short plan year – Form 5500 would be due 7 months after the month end when assets were fully distributed (i.e. if assets were zero on September 15, 2020, Form 5500 would be due April 30, 2021).
Audit considerations: In the year that plan termination is authorized, plan financial statements will use the liquidation basis of accounting. For most plans, there will be no impact if mutual funds and other quoted investments are used, and valuation is daily. Auditors will need an amendment or Board resolution with a termination effective date, and will be testing distributions to ensure accounts are 100% vested. Keep in mind that the plan audit requirement is based on the participant count as of the first day of each plan year (usually January 1), so large plans will likely still need a 2020 audit even if termination occurs, and possibly in 2021 depending on the timing of distributions.
Q5: What do plan sponsors need to do if adopting CARES Act provisions?
A5: Plan sponsors may adopt CARES Act provisions without a formal amendment, which can be deferred under the Act. Because of this, sponsors should document their decision to adopt any new plan provisions in either a Board resolution, committee meeting minutes, or memo. Sponsors should work with their TPA or record keeper to provide timely notices to employees, and monitor new transactions for compliance with the Act. A formal amendment should be signed as soon as administratively possible.
Audit considerations: Sponsors will need to provide documentation of the plan’s adoption of CARES Act provisions and the effective date. Auditors will request signed employee statements or distribution and loan applications that self-certify the employee is eligible for benefits under the Act. During these challenging times, sponsors are juggling many aspects of their operations and employee benefit issues. We encourage you to keep operating your plan as normal as possible – remit timely contributions, maintain complete and accurate census data, and above all, follow the terms of your plan document at all times.
If you have further questions about your plan operations or how your audit will be impacted, please contact Wende Wadsworth at wende@sweeneyconrad.com.