Before You Adopt Those COVID-19 Loan and Distribution Provisions…
The new CARES Act retirement plan distribution and loan provisions for participants affected by the COVID-19 pandemic are apparently quite popular with retirement plan recordkeepers, so much so that at least one large recordkeeper told their plan sponsors that they had just five days to opt out, or the recordkeeper would adopt the new provisions for them! Some other recordkeepers have followed suit by providing deadlines for decisions that are less than two weeks from the enactment of the legislation.
Why the rush? To be honest, I don’t know. Perhaps some of the recordkeepers view this as a solution to the explosion in participant call volumes they have experienced or maybe there is another business reason. However, it is important to understand that recordkeepers will not be the ones on the hook for any hasty decisions that are made in this regard - that liability will rest squarely on the shoulders of the plan fiduciaries. And, as with any fiduciary decision, a prudent process should be followed, and that prudent process is probably going to take longer than five days!
Should plan sponsors adopt the new loan and/or distribution rules? Here are some things to consider:
- How is the organization faring during the COVID-19 pandemic? — If the company has laid off/furloughed/reduced hours for many plan participants, or plans to do so, there is a higher chance of receiving participant backlash for not allowing the COVID-19 loans/withdrawals.
- Are participants beating down the door of their recordkeeper to take loans and distributions? — If so, a plan sponsor may be more inclined to adopt the new rules to meet the needs of their participants. If not, it may make sense to wait and see if the demand increases before taking action. The loan provision currently expires on September 21st, and the withdrawal provision expires at year-end, so plan sponsors do not have too long to wait. This also provides plan sponsors more time to evaluate the depth and breadth of the effect of the COVID-19 pandemic on their workforce.
- Is compromising the retirement future of plan participants worth it to address what is (hopefully) a short-term issue? — As we discussed in last week’s Top of Mind post, allowing withdrawals, in particular, may result in employees needing to work well past retirement age, since they may not be able to afford to retire. And, with the other assistance made available by the CARES Act (and any future COVID-19 legislation), such as enhanced unemployment benefits, stimulus checks, federal student loan repayment suspension and retirement plan loan repayment suspension, there may not be a significant short-term need for participants to access retirement plan funds. Even if there is a need, there are alternatives to tapping into retirement assets.
Plan sponsors should be aware that the new provisions are not an all-or-nothing proposition. For example, a plan sponsor may adopt the new loan provisions, but not the distribution provisions. Since loans do not have to be repaid for one year, the new loan provisions are an attractive alternative to distributions. And, plan sponsors can elect limits that are lower than the statutory maximum of $100,000.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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