Employee benefit plan sponsors, administrators, and auditors have spent much of the past year addressing the effects the COVID-19 pandemic has had on plan operations, administration, and audits. But we can’t rest easy: the effects of the pandemic could continue well into 2021 and beyond.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides relief to individuals, businesses, hospitals, and others affected by the economic impact of the coronavirus. Some key provisions that address employee benefit plans include the following:
• A waiver of the 10% penalty for coronavirus-related retirement plan distributions up to $100,000
• An increase in the maximum amount of standard plan loans to $100,000 (the 10% penalty was also waived)
• A waiver of the required minimum distribution requirement for 2020
• A delay of required minimum contributions by plan sponsors to single-employer defined benefit plans for 2020 to Jan. 1, 2021
Many employee benefit plans – specifically defined contribution and defined benefit plans – worked with custodians, recordkeepers, and actuaries to rapidly analyze and implement the changes. Beyond 2020, though, plan sponsors will have to amend plan documents if they implemented such changes. In Notice 2020-50, Guidance for Coronavirus-Related Distributions and Loans from Retirement Plans Under the CARES Act, the IRS says an employer retirement plan will not be treated as failing to operate in accordance with its terms merely because the plan implements CARES Act provisions if the employer amends its plan by the dates required by the act. The date by which any employer retirement plan (other than governmental plans) amendments are required is the last day of the first plan year beginning on or after Jan. 1, 2022. For calendar year plans, that would be Dec. 31, 2022.
During 2020, the CARES Act also allowed eligible plan participants in certain employee benefit plans – including 401(k)s and 403(b)s – to take an early distribution of up to $100,000. Although the 20% withholding is not applicable to what has been referred to as “coronavirus-related distributions,” income taxes still apply. Plan participants who take a coronavirus-related distribution can choose to spread the taxes owed over three years (2020, 2021, and 2022). If a plan participant redeposits the withdrawal amount into his or her participant account within three years, no income tax is owed on that withdrawal. So, while the individual tax effects of coronavirus-related withdrawals may not directly affect plan operation and administration, plan management should ensure that participants are aware of the tax liability and tax relief potential.
For employee benefit plans that offer participant loans, the pre-CARES Act provisions stated that participants could borrow up to $50,000 or 50% of their vested balance, whichever was less. Repayment was to begin immediately and was required within five years, unless the participant loan was made specifically for the purchase of the participant’s primary residence. The CARES Act increased participant loan limits to $100,000 or 100% of the participant’s vested balance, whichever is less. Also, participants with loans could defer repayment during 2020; however, interest will continue to accrue. This could add another year to the participant loan repayment timeline. Employee benefit plan management will have to work with recordkeepers to reamortize participant loans and adjust repayments beginning in 2021.
Audit programs and procedures may require changes if a plan has adopted CARES Act provisions related to coronavirus-allowed distributions, participant loans, or required minimum distributions. Also, if the plan has not been formally amended, the plan may consider the need to disclose that fact.
The COVID-19 pandemic also may affect the performance of plan-related controls at the plan sponsor. With most entities shifting to stay-at-home workforces, controls over plan monitoring and administration may look differently or may not be performed with the same rigor. A big question looms regarding the performance of Service Organization Control – Type 1 (SOC 1) examinations at third-party recordkeepers for 2020 and thereafter. How will these examinations be performed, and have changes in work arrangements at third-party service organizations affected the performance of controls, and the service auditor’s report? Again, plan auditors should discuss these potential changes with plan management during the planning phase of an employee benefit plan audit. Plan management should be prepared to address these items.
It is likely the COVID-19 pandemic will not be a one-year phenomenon for plan sponsors, administrators, and auditors. The implications of COVID-19 specific legislation and changes to policies, procedures, and controls may impact employee benefit plans in 2021 and beyond. Staying abreast of the guidance and legislative developments will help you navigate the changing landscape.
JulieAnn C. Verrekia, CPA, is director of quality control with Torrillo & Associates LLC in Glen Mills and a member of the
Pennsylvania CPA Journal Editorial Board. She can be reached at email@example.com.