The American Retirement Association is calling on the Treasury Department to provide funding relief for DC plans to help employers facing significant financial burdens relating to the Coronavirus.
In a March 24 follow-up letter, the ARA notes that it is continuing to receive many questions about concerns relating to retirement plans, especially retirement plans sponsored by small businesses (see The Impact of Coronavirus. “The financial crisis facing employers might force them to terminate their plans rather than keeping them intact, but partially frozen, until the business recovers,” the ARA warns in the letter to Carol Weiser, Benefits Tax Counsel with the Department of Treasury.
Safe Harbor Contributions
The ARA explains in the letter that an ADP safe harbor may be terminated or amended during a plan year provided that certain conditions are met, including that notice is provided to eligible employees. However, many employers and service providers that would customarily assist employers in preparing amendments and notices are either closed or were forced to change to telecommuting in a very short period. Consequently, this may limit the ability to adopt plan amendments and/or provide applicable notices to employees.
To address this dilemma, the ARA recommends the following relief, until Dec. 31, 2020 (regardless of the plan year), with the possibility that an extension might be warranted depending on future circumstances.
- Modify the regulations to provide that safe harbor contributions may immediately stop accruing upon an employer memorializing such intent (formal or informal). The employer would need to notify eligible employees within 90 days of the reduction or cessation. In addition, a formal plan amendment could be adopted no later than the last day of the plan year to which the cessation or reduction applies.
- To encourage employers now subject to, and affected by the top-heavy rules to keep those plans running, modify the regulations to provide that a plan will not fail to satisfy safe harbor status provided:
- the cessation or modification is due to a substantial business hardship comparable to a substantial business hardship described in Code Section 412(c), and
- no highly compensated employee within the meaning of Code Section 414(q) may make elective deferrals or employee contributions for the remainder of the plan year in which safe harbor contributions are ceased or reduced.
Partial Termination Relief
The ARA further notes that as employees, particularly those employed by small businesses, are being laid off or furloughed, questions have arisen about whether the partial termination provisions of Code Section 411(d)(3) are triggered. “ARA believes relief is necessary from the partial termination trigger due to extraordinary circumstances of this crisis; if all non-vested or partially vested plan participants were to become fully vested under IRC 411(d)(3), plan sponsors would only face further dramatic business hardship due to increased funding costs,” the letter states.
In response, the ARA recommends that a temporary period for the 2020 plan year be established whereby partial terminations are deemed not to occur if the plan sponsor’s business has been affected by the Coronavirus emergency and if those employees are rehired by Dec. 31, 2020.
Alternatively, the ARA recommends that the IRS provide guidance that under the facts and circumstances, it will find that a partial termination did not occur if the number of active participants under the plan as of a date that is no more than six months after the national emergency is lifted is not fewer than 80% of the number of active participants on the day prior to March 13, 2020 (the date the national emergency was declared).
The ARA also comments that:
- To address the increased risk of participant loan defaults, plans sponsors should be able to change the date of default from the date of termination of an employee, to a later date that is not earlier than Dec. 31, 2020.
- Since many plan sponsors are uncertain whether the national emergency declaration qualified as a “heavy and immediate financial need” under the IRS’ safe harbor distribution reasons, the IRS should issue guidance clarifying that the current national emergency is a federally declared disaster as described in the Treasury regulations.
- The IRS should provide a temporary relaxation of administrative requirements for hardship withdrawals and loans, including self-certification by the participant, if the employer, plan administrator or other individual is not available.
- The IRS should clarify that Form 5498 reporting has been delayed until at least Aug. 31, 2020, based on the July 15, 2020 tax filing extension.
- Reporting changes for Form 1099-R and Form 5498 with respect to forthcoming distribution relief, should be optional for the 2020 tax reporting year and any changes should not be mandatory until the 2021 tax reporting year.
This follow-up letter expands on a March 16 letter from the ARA pressing for relief from certain retirement plan filing deadlines. Both letters observe that the Treasury Department and IRS have been very responsive in times of national emergencies and that these issues are within the scope of the agencies’ regulatory authority under Code Section 7508A and the March 13 national emergency declaration.