401(k) Update: Q2 2020
by Vita, on April 6, 2020
Passage of the CARES Act
Congress passed the CARES Act on March 27, 2020 to help participants and plan sponsors through the economic consequences of the COVID-19 viral pandemic.
Relief to participants: The CARES Act has three main provisions for those impacted by COVID-19, as related to retirement plans:
- Penalty-free Withdrawals of up to $100,000
- Loan limit raised to $100,000 with payments delayed for one year
- No Required Minimum Distributions (“RMDs”) in 2020
For more details about the CARES Act and other recent legislation that may impact employers, please refer to Vita’s COVID-19 Employer Playbook, a comprehensive overview of key issues facing employers at this time.
We should note that there are other potential changes in the pipeline. The following relief is being sought but no decisions have yet been made:
- Extension of all plan-related deadlines, including the filing due date of the Form 5500
- Relief from mandatory employer contributions (such as Safe Harbor contributions)
- Clarification of how furloughs, paid/unpaid leave, or reductions in hours are treated in relation to eligibility, vesting, “break-in-service” rules, partial plan termination, etc.
Amending Safe Harbor Plans Mid-Year
Did you know it is possible to amend your Safe Harbor plan mid-year to reduce or suspend Safe Harbor contributions? There are several rules and considerations when it comes to amending a Safe Harbor Plan but please know that is possible to reduce or suspend Safe Harbor contributions mid-year. Below are the guidelines for such a change.
The company must be operating at an economic loss OR the company must have included a potential reduction/suspension statement in the annual safe harbor notice AND must satisfy the following procedural requirements:
(1) Must adopt a plan amendment before the end of the applicable plan year to reduce or suspend Safe Harbor contributions. This amendment should not be effective earlier than:
- Date it is adopted (i.e. needs to be adopted before it is effective), and
- 30 days after participants have received the “supplemental notice.”
(2) Must give participants a “supplemental notice.” The “supplemental notice” is a notice explaining the consequences of the amendment that reduces or suspends the plan’s matching or nonelective contributions, the procedures for changing their salary deferral elections (and their employee contribution elections, if applicable) and the effective date of the amendment.
(3) Must give participants a reasonable opportunity after they receive the supplemental notice, and before the change is effective, to change their salary deferral elections (and their employee contribution elections, if applicable).
(4) Must make all safe harbor contributions through the effective date of the amendment. This means you would still be obligated to fund the Safe Harbor match each pay period till the effective date of suspension.
(5) The plan will not have deemed Safe Harbor for testing. The plan must pass the actual deferral percentage (ADP) test and the actual contribution percentage (ACP) test (if ACP is applicable) for the entire plan year in which the Safe Harbor contributions are reduced or suspended, using the current year testing method. This means the amendment to remove Safe Harbor would need to be prospectively effective but the impact of removing subjects the plan to the testing for the full plan year.
(6) The plan must satisfy the top-heavy test.
Large Retirement Plans: Start Scheduling Your Independent Audit
The independent audit requirement applies to employers who sponsor “large” plans – those with over 100 participants on the first day of the Plan Year (January 1st for Calendar Year plans). There are special rules that allow for growing companies to first exceed 120 participants before becoming subject to the audit requirement, and thereafter continue being subject to the requirement while staying above the 100-participant threshold. Please contact Vita Planning Group if you have questions about whether the independent audit requirement applies to your Plan.
For other important dates on the horizon, please check out our online Compliance Calendar.
Form 5500 Season Coming Up
While the IRS has extended the deadlines for many tax filings (e.g., personal taxes), please note that the Form 5500 filing deadline remains unchanged. Calendar-year retirement Plans’ Form 5500 filings are due on July 31st, or October 15th, if your plan has been put on extension.
We will continue to watch for any updates within this area and will keep you updated should the Form 5500 filing deadline be extended further in light of current events.
The international effort to stem the spread of the COVID-19 “coronavirus” caused wild swings in all asset markets in the first quarter of 2020. Equity markets fell as traders attempted to price-in the impact of social distancing measures on global GDP; the US Government bond market rose as the US Federal Reserve Bank (the “Fed”) cut interest rates and re-instituted quantitative easing in order to ensure the liquidity of the US financial system. The S&P 500 Index reached its all-time high of 3,386 on February 19th only to fall 30% by March 24th, finally finishing the quarter down 24%. Similarly, the MSCI All Country World ex US index finished the quarter down 30%. By contrast, the BarCap US Aggregate Bond Index finished the quarter up 3.1% after hitting a high of up 6% on March 9th. The full economic impact of COVID-19 will likely be felt in Q2 2020. However, governments around the world appear committed to deploying any and all policy tools to mitigate the damage to individuals and companies.
2020 will likely be the year of a “U” shaped recession in the US: a very sharp fall in Q2 followed by one or two quarters of flat to slightly negative growth and a rebound in Q1 2021. US GDP growth for Q1 2020 is expected to be flat at best, or slightly negative. This reflects increased spending due to hoarding seen at the beginning of the quarter and lockdowns at the end. Estimates for Q2 economic are for a drop of between -15% to -20%. We’ve already seen US jobless claims hit consecutive record levels in the last two weeks of March: 3.3M on March 21st and 6.6M on March 28th. Forecasts are for the US unemployment rate to rise from its Q1 low of 3.5% to the mid-teens by Q3 2020. The earliest economists are predicting positive GDP growth in the US is the fourth quarter of 2020, but it is more likely that we will not see a strong rebound in US GDP growth until Q1 2021, once a vaccine and cure for COVID-19 is found and deployed.
If there is good news in all of this it is that global economic fundamentals prior to the outbreak of COVID-19 were sound and government’s response has been swift and forceful. On February 28th, Fed Chairman Jerome Powell committed the Fed to using “our tools and act as appropriate to support the economy”. Since then, the Fed has cut the Fed Funds rate to zero, pledged to expand its purchases of securities in volume and type, and established new credit facilities in various parts of the financial markets. On March 27th, Congress passed a $2.3 trillion rescue package, three times the $750 stimulus package passed in response to the financial crisis of 2008/2009. The “CARES Act” provides cash payments to lower income households, expanded unemployment benefits to laid off and self-employed workers, grants to small businesses to maintain employment, loans to companies, cities and states, and health-care spending and tax breaks. All of this is meant to help protect workers and businesses; so that unemployment does not impoverish workers and that diminished revenue does not bankrupt companies until such time as the health emergency is over and we can all come out of our homes and start spending again.
At times like these, it is important for long-term retirement plan investors to remember the fundamentals. The economy and the stock market will recover: since 1950, it has taken an average of 401 days for the S&P 500 to recover its high after a decline of 20% or more. Stocks remain the most consistent long-term wealth generator available to the average investor: since 1926, the annual compound rate of return for large cap US equities is 10.2%, compared with 5.5% for US Government Bonds. Diversification works: over the past quarter, a balanced portfolio of 60% equities and 40% bonds would have lost 15% as compared to the 24% loss of an equity-only (S&P 500) portfolio. In addition, the market fluctuations in Q1 would already have made the balanced portfolio more conservative, to 54% equities and 46% bonds. Those same market fluctuations have improved valuations for US stocks, bringing them below the 25-year average, and lowered the yield on the 10-year Treasury to 0.6%. If a diversified portfolio made sense before the recent market movements, then this is a good opportunity to rebalance back to 60-40. Staying the course on one’s long-term retirement investment plans may not feel comfortable during the market swings that will happen over the next weeks and months. But like other good advice regarding COVID 19, it is important not to touch two things: your face and your 401(k).