Coronavirus (COVID-19) Regulations & 401(k) Plan Considerations

Coronavirus (COVID-19) Legislation Overview

The Consolidated Appropriations Act of 2021 (CAA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

• On March 27, 2020, the CARES Act was signed into law. It includes multiple provisions affecting employers and 401(k) plans, which are highlighted below.
• Although many of the CARES Act provisions for 401(k) plans have since expired, the Consolidated Appropriations Act of 2021 (CAA), signed into law on December 27, 2020, temporarily replaced or extended some of the provisions. It also included some new provisions affecting 401(k) plans that were not in the CARES Act.

Expanded Access to Penalty-Free Distributions

Effective for distributions made through June 25, 2021.

• Qualified Disaster Distributions. Although the CARES Act provisions regarding “coronavirus-related distributions” (see below) expired on December 30, 2021, the CAA added a similar provision permitting “qualified disaster distributions, that are effective through June 25, 2021.
• For purposes of the CAA, a “qualified disaster distribution” is any distribution made from 401(k) plan on or after the first day of the occurrence of a “qualified disaster” prior to June 25, 2021.
• To qualify, the individual’s principal place of abode during the incident period must be located in a “qualified disaster area,” and the individual must have sustained an economic loss because of the disaster.
• All fifty states and the District of Columbia have been designated as “qualified disaster areas” due to the pandemic, and the pandemic itself meets the statutory definition of “qualified disaster” pursuant to federal law.
• The aggregate amount of distributions that may be treated as “qualified disaster distributions” for any tax year generally may not exceed $100,000.
  • The aggregate amount would seemingly include the amount of any “coronavirus-related distributions” under the CARES Act (see below) received in 2020
• Coronavirus-Related Distributions — Now Expired. Under the CARES Act, eligible individuals could withdraw penalty-free up to a total of $100,000 from their retirement accounts in a “coronavirus-related distribution.” This provision expired on December 30, 2020 but was replaced by a similar provision permitting temporary “qualified disaster distributions” under CAA (see above).
• For purposes of the CARES Act, a “coronavirus-related distribution” is a distribution made during 2020 to an individual (a “qualified individual”):
  • Who is diagnosed with either SRS-COV-2 or COVID-19 by a test approved by the US Centers for Disease Control and Prevention (“CDC”); or
  • Whose spouse or eligible dependent is diagnosed with either one of the above two diseases; or
  •  Who, due to either one of the above two viruses or diseases:
    • Experiences adverse financial consequences as a result of being quarantined, furloughed, or laid-off; or
    • Has his or her work hours reduced; or
    • Is unable to work due to the lack of childcare; or
    • Who is subject to other factors, as may be determined by the Secretary of the Treasury.
• Participants may repay the distributed amount at any time within three years from the date of receipt of the “coronavirus-related distribution.”
• For tax purposes, repayments made within the three-year period are treated as though they were direct-trustee to-trustee transfers of eligible rollover distributions, thus avoiding taxation.
• Plan administrators may rely on a participant’s certification that he or she satisfies the above conditions as to whether any distribution meets the requirements of a “coronavirus-related distribution.”
• Distributions meeting these are treated as hardship withdrawals and are not subject to the otherwise applicable 10% penalty tax.
  • They are, however, subject to regular income taxation. To help soften the blow, the CARES Act generally spread the income out over a three-year period, beginning with the 2020 tax year, unless a participant elects otherwise.

401(k) Plan Loan Limits Temporarily Doubled for Qualified Individuals

Effective for the 180—day period beginning on December 27, 2020 and ending on June 25, 2021.

• CAA. Solely with respect to loans made to a “qualified individual,” the maximum amount that an individual may borrow from his or her 401(k) plan account (reduced by the outstanding amount of any previous loans taken from the plan) is the lesser of:
  • $100,000 (up from $50,000); or
  • 100 percent of his or her vested account balance (up from 50 percent of the vested account balance).
• For these purposes, under CAA, a “qualified individual” is any individual whose principal place of abode during the incident period is located in a “qualified disaster area,” and the individual has sustained an economic loss because of the disaster.
• All fifty states and the District of Columbia have been designated as “qualified disaster areas” due to the pandemic, and the pandemic itself meets the statutory definition of “qualified disaster” pursuant to federal law.
• CARES ACT — Now Expired. For these purposes, under the CARES Act, a “qualified individual” was a plan participant who meets the qualifications listed in bullet points under “Coronavirus-Related Distributions,” above.
  • These are the same qualifications required to qualify for coronavirus-related distributions under the CARES Act (see above).

Delayed 401(k) Plan Loan Repayments

Effective for loan repayments due between the first day of the incident period of a qualified disaster and 180 days following the last day of such incident period.

• CAA — If a plan loan repayment is due between the first day of the incident period of a qualified disaster and 180 days following the last day of such incident period, then the repayment is delayed for one year, measured from the original due date.
• Subsequent loan repayments must be adjusted to reflect the delay in the repayment (including any interest accruing during that delay).
• “Incident period” means the period specified by FEMA as the period during which the disaster – for example, the COVID-19 pandemic – occurred, or continues to occur.
• CARES Act — Now Expired.  If a plan loan repayment is due between March 27, 2020 and before the end of the year 2020, then the repayment may be delayed for one year, measured from the original due date.
• Subsequent loan repayments must be adjusted to reflect the delay in the 2020 repayment (including any interest accruing during that delay).

Required Minimum Distributions Suspended for 2020 — Now Expired

• Effective for required minimum distributions (RMDs) otherwise due on April,1 2020.
• The CARES Act eliminated the requirement to take RMDs for calendar year 2020 only.
• 401(k) participants and beneficiaries who are not actively employed generally must take RMDs for 2021 by no later than April 1, 2021.
• Per IRS guidance, participants who took RMDs during 2020 may roll over the amount of the RMD to the same or another 401(k) plan (or to an IRA) at any time before August 31, 2020.

CAA — Recontributions of 401(k) Plan Distributions Used for Home Purchases in Qualified Disaster Areas

Effective for qualified distributions made during the “applicable period,” as defined below.

• An individual who receives a “qualified distribution” (see below) may, during the “applicable period” (see below), make one or more contributions, in an amount not to exceed the amount of the distribution, to an eligible retirement plan that accepts rollovers.
• For these purposes, a “qualified distribution” means a distribution from a 401(k) plan intended to purchase or construct a principal residence in a “qualified disaster area,” which was not actually used for this purpose, due to a “qualified disaster.”
• The qualified distribution must have been received during the period beginning on the date which is 180 days before the first day of the incident period of the qualified disaster, and ending on the date which is 30 days after the last day of the incident period.
• All fifty states and the District of Columbia have been designated as “qualified disaster areas” due to the pandemic, and the pandemic itself meets the statutory definition of “qualified disaster” pursuant to federal law.
• “Applicable period” means the period beginning on the first day of the incident period of the qualified disaster and ending on June 25, 2021.

CAA — Temporary Partial Plan Termination Provisions

Effective from the period beginning on March 13, 2020 and ending on March 31, 2021.

• A 401(k) plan will not be treated as having experienced a “partial termination” if the number of active participants in the plan on March 31, 2021 is at least 80 percent of the number of active participants that were covered on March 13, 2020.

Coronavirus (COVID-19) Official Governmental Agency Guidance (Deadline Extensions and Fiduciary Relief)

Caution! Now Expired
IRS Notice 2020-18 extends the deadline for making contributions to 401(k) plans for the 2019 plan year until July 15, 2020 (as opposed to April 15, 2020).

Caution! Now Expired
IRS Notice 2020-23 extends the following deadlines relating to 401(k) plans, that otherwise would fall on or after April 1, 2020 and before July 15, 2020, until July 15, 2020:

•  The deadline for a participant to make a 401(k) plan loan payment, taking into account any applicable cure period.
•  The deadline for an employer to distribute employee deferrals in excess of the applicable annual limit ($19.500 for 2020, or $26,000 for participants age 50 or older), adjusted for earnings, made to 401(k) plans.
• The deadline for an employer to distribute employee deferrals, adjusted for earnings, to comply with the ADP test, and also to avoid the 10-percent penalty tax.
• The deadline for an employer to distribute employer matching contributions, adjusted for earnings, to comply with the ACP test, and also to avoid the 10-percent penalty tax.
• The deadline for an employer to distribute employer contributions made in excess of the Code’s deduction limits, to the 10-percent penalty tax.
• The deadline for a 401(k) plan participant to take an initial required minimum distribution (“RMD”) from a plan by the April 1st of the year following the year in which the participant attains age 72.
  • See also “Required Minimum Distributions Suspended for 2020,” above.
• The deadline for a participant to elect a permissible withdrawal under a 401(k) plan having an “eligible automatic contribution arrangement” (“EACA”).
• The deadline for a plan to complete self-correction of certain 401(k) plan operational failures by the last day of the second plan year following the plan year in which the failure occurs, under the IRS’ EPCRS program.
•  The deadline for an employer or plan sponsor to file a 401(k) plan’s annual Form 5500 series return due on or after April 1, 2020, and before July 15, 2020. Plans with filing due dates that land within this time frame, including due dates after filing an extension, will now have until July 15, 2020, to submit these filings to the Department of Labor (DOL).

EBSA, DOL, IRS Final Rule: “Extension of Certain Timeframes for Employee Benefit Plans, Participants, and Beneficiaries Affected by the COVID-19 Outbreak”

• The following deadlines relating to 401(k) plans’ ERISA claims procedures are extended through the “outbreak period,” as explained below:
  • The date within which individuals may file an initial claim for benefits under the 401(k) plan’s ERISA claims procedure.
  • The date within which claimants may file an appeal of an “adverse benefit determination” under the 401(k) plan’s claims procedure.
  • The date within which claimants may file a request for an external review after receipt of an “adverse benefit determination,” or receipt of a final internal “adverse benefit determination.”
  • The date within which a claimant may file information with the plan administrator to perfect a request for external review upon a finding that the initial request was not complete.
• Plans must disregard the period from (i) March 1, 2020 until (ii) 60 days following the announced end of the National Emergency that was declared on March 13, 2020 (or until such other date as may be provided in a future notice).
  • This period is known as the “outbreak period.”

EBSA Disaster Relief Notice 2020-01

• Extended Time for Certain Notices
  • A 401(k) plan and its fiduciary will not be in violation of ERISA for a failure to timely furnish a notice, disclosure, or document required under Title I of ERISA:
    • Between March 1, 2020, and 60 days after the announced end of the COVID-19 National Emergency.
    • The plan and fiduciary must act in good faith, and that they furnish the notice, disclosure, or document as soon as administratively practicable under the circumstances.
    • Applies to documents required under Title I of ERISA other than documents specifically covered under the EBSA, DOL, IRS Final Rule, “Extension of Certain Timeframes for Employee Benefit Plans, Participants, and Beneficiaries Affected by the COVID-19 Outbreak” (see above).
• Participant Loans and Plan Distributions
  •  A 401(k) plan will not be in violation of the plan’s procedural requirements for participant loans or plan distributions (such as verification requirements) if:
    • The failure is solely attributable to the COVID-19 outbreak;
    • The plan administrator makes a good-faith, diligent effort under the circumstances to comply with those requirements; and
    • The plan administrator makes a reasonable attempt to correct any procedural deficiencies (such as assembling any missing documentation) as soon as administratively practicable.
    • This relief does not extend to spousal consents or other statutory or regulatory requirements specifically under the jurisdiction of the IRS.
• Plan Loans Under CARES Act

NOTE: The CARES Act 401(k) loan provisions have expired and were replaced with similar provisions under CAA (described above). It is unclear as to whether this relief extends to the similar CAA loan provisions.

• • No person will be treated as having violated Title I of ERISA, including the requirements that loans be adequately secured, and that they be made available on a reasonably equivalent basis, solely because:
    • The person made a plan loan to a “qualified individual” during the loan relief period in compliance with the CARES Act (see above); or
    • A “qualified individual” delayed making a plan loan repayment in compliance with the CARES Act.
• Employee Contributions and Loan Repayments
  • The DOL and EBSA will take no enforcement action against an employer for a temporary delay – solely attributable to the COVID-19 outbreak – in forwarding employee contributions or loan repayments to a plan’s trust:
    • During the period beginning on March 1, 2020, and ending on the 60th day following the announced end of the National Emergency.
    • Employers and service providers still must act reasonably, prudently, and in the interest of employees to comply as soon as administratively practicable under the circumstances.
• Blackout Notices
  • A 401(k) plan and its fiduciary will not be in violation of ERISA for a failure to timely furnish a “blackout notice”:
    • Between March 1, 2020, and 60 days after the announced end of the COVID-19 National Emergency.
    • The plan and responsible fiduciary must act in good faith; and
    • They furnish the notice as soon as administratively practicable under the circumstances.
• Form 5500 Series Filings — Now Expired
  • The DOL deadline for an employer or plan sponsor to file a 401(k) plan’s annual Form 5500 series return due on or after April 1, 2020, and before July 15, 2020. Plans with filing due dates that land within this time frame, including due dates after filing an extension, will now have until July 15, 2020, to submit these filings to the Department of Labor (DOL).
• CARES Act Plan Amendments

NOTE: It is unclear as to whether this guidance applies to plan amendments for provisions in the CAA that are similar to the CARES Act provisions they replace.

• • If a 401(k) plan is amended to incorporate the CARES Act provisions, the plan will be treated as being operated in accordance with the terms of the amendment prior to its adoption if:
    • The amendment is made on or before the last day of the first plan year beginning on or after January 1, 2022 (or such later date as may be prescribed in IRS regulations); and
    • The plan is operated in accordance with the terms of the amendment in the interim.
• Fiduciary Compliance
  • The guiding principle for plan fiduciaries is “to act reasonably, prudently, and in the interest of covered workers and their families” under the 401(k) plan.
    • Fiduciaries are urged to make reasonable accommodations to prevent loss of benefits or undue delay in benefit payments.
    • Fiduciaries should always attempt to minimize the possibility that plan participants might lose benefits due to failures to comply with pre-established timeframes.

IRS Coronavirus-Related Relief for Retirement Plans Questions and Answers

Caution! The CARES Act coronavirus-related distributions and expanded participant loan provisions have expired (see above). It is unclear as to whether the guidance described in this section would apply to the similar “qualified disaster distributions” and temporarily expanded loan provisions under the CAA.

These Q&As clarify CARES Act provisions relating to expanded 401(k) plan distributions and plan loans.

• “Qualified Individual” Defined:
  • For purposes of both the expanded 401(k) plan distribution rules and the temporarily increased participant loan limits (see “CARES Act,” above), the term “qualified individual” means:
    • An individual diagnosed with the virus SARS-CoV-2, or with coronavirus disease 2019 (COVID-19), by a test approved by the CDCP;
    • An individual whose spouse or dependent is diagnosed with either of the above viruses or diseases;
    • An individual who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having their hours reduced due to either of the above viruses or diseases;
    • An individual who experiences adverse financial consequences as a result of being unable to work due to a lack of child care due to either of the above viruses or diseases; or
    • An individual who experiences adverse financial consequences as a result of the closing of, or reduction of hours of, a business owned or operated due to either of the above viruses or diseases.
• “Coronavirus-Related Distribution” Defined:
  • A “coronavirus-related distribution” is a distribution that is made from a 401(k) plan to a “qualified individual” (see above).
    • From January 1, 2020, to December 30, 2020.
    • Up to an aggregate limit of $100,000.
  • If an individual is covered by more than one 401(k) plan (or if he or she takes a similar distribution from an IRA), then all plans and IRAs are consolidated for purposes of the aggregate limit.
• Ten-percent Penalty Tax:
  • The 10% additional tax to early distributions does not apply to coronavirus-related distributions.
• Income Taxation of Coronavirus-Related Distributions:
  • A coronavirus-related distribution is subject to regular income tax, levied ratably over a three-year period, beginning in 2020. However, taxpayers have the option of being taxed on the entire amount in 2020.
• Repayments of Coronavirus-Related Distributions:
  • Qualified individuals may repay all or part of a coronavirus-related distribution to a 401(k) plan, so long as the repayment is completed within the three-year period following the date on which the distribution was received.
    • If the amount is fully repaid, then the recipient does not owe federal tax on the distribution, since it is treated as a direct trustee-to-trustee transfer to the plan.
    • 401(k) plans are not required to accept rollover contributions. A plan is not required to change its terms or procedures to accept repayments of coronavirus-related distributions.
• Delayed Loan Repayments:
  • If a loan is outstanding on or after March 27, 2020, and a repayment is due at any time from March 27, 2020 until December 31, 2020, then the due date may be delayed for up to one year, measured from the original due date.
• Expanded Distribution and Loan Provisions Are Option:
  • The expanded distribution and/or participant loan rules are optional (employers may choose to adopt either or both provisions, or neither of them).
• Reliance on Employee Certifications:
  • Plan administrators may rely on participant certifications that they satisfy the conditions of a “qualified individual” for purposes of coronavirus-related distributions, absent actual knowledge to the contrary.
• Reporting Coronavirus-Related Distributions:
  • 401(k) plans report payments of coronavirus-related distributions to qualified individuals on Form 1099-R, regardless of whether or not the qualified individual repays all or part of the coronavirus-related distribution to the plan.
  • Qualified individuals use IRS Form 8915-E (expected to be available before the end of 2020) to report any repayment of a coronavirus-related distribution, and to determine the amount of the coronavirus-related distribution that is includible in income for a particular year.

Expanded Eligibility for Coronavirus-Related Distributions and Loans

Caution! The CARES Act coronavirus-related distributions and expanded participant loan provisions have expired (see above). It is unclear as to whether the guidance described in this section would apply to the similar “qualified disaster distributions” and temporarily expanded loan provisions under the CAA.

IRS guidance released in June 2020 expands the definition of “Qualified Individual” for purposes of both Coronavirus-Related Distributions and expanded plan loans to include any individual who:

• Experiences a reduction in pay (or self-employment income) due to COVID-19, or has a job offer rescinded, or an employment start date delayed, due to COVID-19;
• Has a spouse or “household member” (defined as an individual who shares the participant’s principle residence) who:
  • Has been quarantined, furloughed, or laid off,
  • Has had his or her work hours reduced due to COVID-19,
  • Is unable to work because of the lack of child care,
  • Had a reduction in pay (or self-employment income) due to COVID-19, or
  • Had a job offer rescinded, or start date delayed, due to COVID-19; or
• Had a business owned or operated by the individual’s spouse or household member that had to close, or reduce hours, because of COVID-19.

Reductions of Suspensions of Safe Harbor Contributions in Response to COVID-19 — Now Expired

IRS guidance released in June 2020 permits employers to temporarily reduce or suspend either safe harbor matching contributions or safe harbor nonelective contributions, without violating the general rule limiting midyear amendments, provided the amendment is adopted between March 13, 2020, and August 31, 2020. Further, in the case of safe harbor non-elective contributions only, the otherwise applicable requirement to provide participants and beneficiaries with a supplemental notice informing them about the terms of the amendment is eliminated.

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