With the widespread business and financial slowdowns resulting from COVID-19, many employers are trying to safeguard their very existence through various austerity and cost-control measures. These measures sometimes manifest in the form of layoffs, furloughs and pay reductions, adding uncertainty to workers’ lives and potentially forcing individuals to make difficult decisions on how to spend their limited resources.
This concern is clearly evident in those individuals who have been laid off, been furloughed or experienced a pay cut. In this atmosphere, many workers who have not been so affected are also concerned and seek comfort in being able to plan for the worst. This is the economic equivalent of the supply-hoarding we have seen in stores or on the daily news.
Our experience shows that employers and plan sponsors are extremely sensitive to these concerns and are interested in exploring every available opportunity to help their workers during these difficult times.
With respect to retirement plans and individuals directly impacted by COVID-19, the Coronavirus Aid, Relief, and Economic Security, or CARES, Act was the first COVID-19-related legislation to make such an individual’s retirement savings readily accessible, and to permit choice in resource allocation by waiving things like loan repayments, penalty taxes and withholding on early distributions.
Some of the CARES Act’s relief, in the form of maximum $100,000 distributions, loans of up to the lesser of $100,000 or 100% of vested account balances for 180 days, and loan repayment suspensions during 2020, was limited to plan participants identified under the act as qualified individuals. A qualified individual is a plan participant who certifies that he or she:
Is diagnosed with COVID-19 by a test approved by the CDC;
Has a spouse or dependent who is diagnosed with COVID-19 by such a test;
Has experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of childcare due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or
Has met other factors as determined by the secretary of the U.S. Department of the Treasury.
As employer familiarity with the CARES Act grows, employers should now consider the overlooked loan repayment suspension and other qualified plan relief embedded within IRS Notice 2020-23 that applies independently of the CARES Act.
So, what exactly is IRS Notice 2020-23 and what does it do? In short, it’s the Treasury’s response to the March 13 federal emergency declaration on COVID-19 that requires the postponement of certain tax deadlines between April 1 and July 15.
The notice provides that if one was subject to a time-sensitive action described in Revenue Procedure 2018-58, then the postponement relief applies to that action. Revenue Procedure 2018-58 applies to many well-publicized aspects of benefit plans such as agency filing deadlines, but it also applies to many under-hyped, participant-friendly benefit aspects, covering cafeteria plans, plan corrections,10% early withdrawal penalties, required minimum distributions, IRAs, rollover timing and plan loan repayments.
Plan loan repayments are significant as many employers and plan sponsors have recently noted from their business planning that management and employees universally favored the ability to suspend loan repayments pursuant to the CARES Act.
This broad benefits application of the IRS’s recent deadline relief is important as it allows employers and plan sponsors to reach beyond the constraints of the CARES Act to offer participants additional flexibility until July 15.
Most notably, employer-sponsored plans can postpone plan loan repayments and certain taxes. These provisions would allow employees and furloughed or laid-off individuals who might not qualify under the CARES Act, for example, to reprioritize the uses of their cash.
Critics of the CARES Act believe that the act ignored the realities of everyday life in the current environment in that its application was too limited. For example, while the CARES Act took the first step in offering flexibility in accessing retirement funds or preserving cash, its limitation to the spouse under the diagnosis prong of the “qualified individual” definition or to the plan participant under the financial-consequences prong ignored the possibility of a domestic partner contracting COVID-19, or the all too common situation of a spouse or domestic partner losing his or her job in a dual-income household.
Likewise, this financial-consequences aspect of the act also ignored unemployed, live-at-home adult dependents or other household members who contributed to the daily budget. Whether intended or not, IRS Notice 2020-23 temporarily remedies this by making every person with certain looming plan deadlines eligible for its benefits relief.
We have observed that some third-party administrators and record keepers have already been discussing with their clients the options provided by IRS Notice 2020-23. Other third-party administrators and record keepers have not been as focused on the opportunities the notice provides for helping plan sponsors design any overall austerity and cost-control measures.
This is because of the all-hands-on-deck distraction caused by the immediate flood of legislation and regulatory developments that required quick, careful analysis and rapid-fire system changes.
Regardless of the situation, it is not too late to revisit any service offerings related to the notice. To speed things along, any needed implementation and communication might be modeled after any preexisting, disaster-relief administrative programming.
Ultimately, demand for implementation of the relief extended by IRS Notice 2020-23 will be driven by plan sponsors that are forced to develop austerity and cost-control measures, while trying to assure their unaffected populations to remain calm. Making this temporary loan repayment and other relief available to plan participants can tip the balance in favor of an individual struggling to make ends meet in the current environment when the CARES Act does not apply.
For example, when plan sponsors consider that in any given month approximately 20% of plan participants have an outstanding loan with an average new loan principal balance of $7,800, the collective temporary savings to participants can be sizeable.
Plan sponsors wanting to explore whether IRS Notice 2020-23 is appropriate for their participants, plans and business planning should contact their third-party administrators, record keepers and counsel as soon as possible to assess feasibility and the impact on loan administration. Remember, this relief is temporary — expiring July 15, 2020, so time is of the essence.