The CARES Act's Lingering Impact on Plan Sponsors
The CARES Act includes several provisions that directly address defined contribution plans - from allowing penalty-free withdrawals under certain circumstances to doubling retirement loan limits. What are your opinions on these provisions' effectiveness for participants and their impact on the plan sponsors' job of running the plan?
I have mixed opinions about the CARES Act penalty free coronavirus related distributions (CRDs) and the increase in loan limits. I am a strong proponent that retirement plan assets should remain in the plan until a participant reaches normal retirement age, since Americans, on a whole, are woefully underprepared for retirement. As such, any legislation that allows participants to take monies from their retirement plan before retirement, whether in a distribution or a loan, is always troubling to me. However, I wholeheartedly understand that we are in an unprecedented situation, so if a participant (or other eligible individual) has experienced a physically or economically devastating coronavirus event and has no other access to funds, it seems that they should have access to at least a portion of their retirement account.
From a participant perspective, CRDs are very effective, given the fact that the CARES Act allows a penalty free distribution (i.e., waiver of the 10% penalty for early distributions and no 20% mandatory tax withholding). Additionally, unless elected otherwise, the participant would be taxed on the CRD, ratably over three (3) taxable years, beginning in the year of distribution, which is very beneficial for the participant, assuming they plan accordingly. The participant may also repay all of part of the CRD into an eligible retirement plan, within three years after distribution to avoid income inclusion altogether and there is no requirement that the repayment be in one lump sum, so participants can repay the withdrawal over the three-year time frame, which is very beneficial to the participant. Additionally, the CARES Act allows plans to provide special loan provisions which would allow a participant to obtain a loan of 100% of their vested account balance up to $100,000, which could be helpful to a participant in the short term, even though they would have to repay the loan. Another CARES Act loan provision allows eligible individuals to defer outstanding loan payments that are due between the date the CARES Act is enacted and December 31, 2020, for up to one year which is definitely beneficial to participants in the short term.
Granted, from a plan sponsor perspective, all of these potential provisions create an administrative burden (i.e., determining whether to amend their plan to provide for CRDs and doubling loan limitations, the plan amendment process, creating and implementing an effective communication plan, the basic administration of the new provisions and dealing with loan deferments). This is even more cumbersome when you consider that many HR departments are sheltering in place.
Interestingly, in my experience, many plan sponsors implemented the CRD provisions, but the CARES Act provision which doubled the potential loan limits, was not as robustly accepted. Many plan sponsors felt that allowing a participant to take a loan was counter-productive, considering the participant could take a CRD penalty free.
Overall, while I understand the legislative appeal of providing access to an individual’s retirement account in these unprecedented times, it impacts plan sponsors by creating additional administrative burdens and potentially reduces a participant’s readiness for retirement, which is counter-productive in the larger picture.
What are your suggested best practices when implementing and communicating these CARES Act provisions to participants? Do you foresee any future fiduciary concerns for plan sponsors related to the implementation of these provisions?
Work closely with your third-party administrator to implement the CARES Act provisions after you have analyzed which provisions are in the best interests of your participants and beneficiaries. As mentioned above, in my experience plan sponsors did not implement every aspect of the retirement plan provisions in the CARES Act, but instead, made an informed determination of what was beneficial for their retirement population, taking all factors into account. It is important to document the reasoning behind the decision-making process. Since the CARES Act provisions are strikingly different than the typical retirement plan distribution and loan rules, an incredibly important element of implementing the CARES Act provisions is a robust and effective communication plan, which should include multiple communications on the new provisions. It is extremely important to provide participants with enough information that they can make an informed decision on whether to take a distribution or loan. Good communication plans will also assist plan sponsors in the future, if participants become disillusioned with their initial decision to take a loan or CRD.
If plan sponsors are thoughtful in relation to implementing the CARES Act provisions, keeping the best interests of the participants and beneficiaries in mind in implementing such provisions and communicating in a clear, honest and thoughtful way, a plan sponsor’s fiduciary concerns about the CARES Act provisions can be managed effectively.
How do you see larger plans (1000+ participants) diverging from smaller plans when reacting to the CARES Act? What are your suggestions for smaller plan sponsors when analyzing the CARES Act that you wouldn't give to larger plan sponsors, and vice versa?
Larger plans usually have more administrative capacity that allows them to absorb and implement legislative changes much easier that smaller plans with less robust administrative capacity. As such, larger plans seem to react a little faster in the implementation process of new legislation provisions. However, faster is not always better, since many new provisions, including the CARES Act provisions need to be analyzed in relation to your specific plan and the needs of the plan’s participants and beneficiaries. Of course, due to the administrative capacity of a larger plan, even if the plan sponsor moves full speed ahead, there is less likely that any unintended administrative hurdles, which are commonplace with new legislation, will dramatically affect the overall plan operation. However, if a smaller plan sponsor with limited administrative capacity moves at warp speed, without contemplating all of the administrative pitfalls of the legislation, they may inadvertently find themselves administratively underwater. As such, smaller plan sponsors should always be aware of the administrative hurdles with new legislation. Granted, that doesn’t mean that they shouldn’t implement new legislation, if it is beneficial for the plan, but merely that implementation must be done thoughtfully.
What are some of the other provisions that don't directly address DC that plan sponsors should be looking at when considering their employees' financial well-being?
Employers having a robust health care plan with responsible deductible and co pays is an important piece of an employees’ financial well-being puzzle. Currently, reminding employees that testing for coronavirus is covered without requiring prior medical authorization or the participant paying the typical cost sharing mechanisms, like deductibles, co-payments or coinsurance is important. Additionally, if the plan sponsor has a health saving account, reminding employees that medical care services and items purchased related to testing for and treatment of coronavirus prior to the satisfaction of the applicable minimum deductible is now allowed.
Additionally, many employees want to be financially responsible, but are not positive where to begin, so money management programs that provide education opportunities in various financial subjects or access to money manager advice can be useful solutions to increase an employees’ financial well-being. These types of education programs can be incredibly helpful, given the current circumstances to assuage financial stress.
In the near term, there are other legislations in the work to provide additional support for the economy like the HEROES Act, what would be your wish list when it comes to provisions that can support the DC plan sponsor community?
What a great question! If I were in charge of the legislative agenda for retirement plans, there are numerous legislative provisions that I would propose to address some of the largest retirement plan conundrums that we currently face. The legislative agenda’s purpose would be to create more retirement saving opportunities and simplify the administration of retirement programs, to facilitate more retirement planning participation overall.
An important issue is getting participants to either save, or save more, for retirement. In my opinion, much more emphasis needs to be placed on creating an environment where retirement saving is an easy and simple process, whether in the employee-employer construct or otherwise.
In the DC plan context, legislation increasing significantly, or eliminating altogether, the overall plan, compensation and deferral limitations could create more retirement savings and by the way, make DC administration much easier. To get more participants in a plan, additional legislation on a mandatory automatic enrollment and a corresponding employee tax credit for individuals making under a certain dollar threshold would be beneficial. There would no longer be any individual enrollment in a DC plan, since it would just happen automatically upon employment, which reduces administrative burden and potential errors. To keep retirement account monies in DC plans, the legislative agenda would eliminate the ability to take a loan, hardship or distribution prior to a certain age, except in a very specific context, like a federal disaster. Such legislation would increase retirement savings and make administration easier. Part of the agenda would include legislation creating a special tax mechanism for employers who provide significant matching or profit-sharing contributions which could incentivize employee participation and employer contributions.
To facilitate easier administration of DC plans, which could also incentivize smaller employers to establish retirement programs, the agenda would include legislation eliminating some of the more archaic rules that were beneficial in 1976, but not necessarily in 2020. For example, legislation eliminating nondiscrimination and coverage testing, or allowing plan sponsors a reasonable way to deal with missing participants, or additional rules on when a plan was not required to correct a minor operational or demographic error would be beneficial and would create a friendlier administrative environment for DC plan sponsors.
Additionally, the agenda would include legislation creating additional tax beneficial saving opportunities through government programs for individuals that either don’t have an employer sponsored retirement plan or want to save even more in addition to an employer provided retirement plan.
All of these types of provisions would assist DC plan sponsors by crafting retirement programs that are easier to implement and manage for the long-term.