Plan Sponsors Ask...Q2 2021

Q: Our business was hanging on in spite of COVID-19, but then our area was hit by wildfires. Can employees who participate in our 401(k) plan take money out of their accounts under the COVID relief provisions?

A: No, but there may be another solution for them. Recognizing that many businesses and employees are suffering the financial effects of fires and other natural disasters, Congress changed the rules about plan loans and distributions for them. Similar to 2020’s COVID relief rules, the Consolidated Appropriations Act, 2021 (the Act), provides for qualified disaster distributions. Those who are eligible for these types of distributions may withdraw up to $100,000 from their eligible retirement account without penalty or withholding. Like a COVID relief withdrawal, the withdrawals may be recontributed over a three-year period. Also allowed under the Act are plan loans up to $100,000 or 100% of the present value of the participant’s vested account balance for qualified individuals. The Act makes an additional provision for participants who took a hardship distribution for the purchase or construction of a principal residence in a qualified disaster area. Such distributions, taken between 180 days before and 30 days after the qualified disaster incident, may be recharacterized if the money was ultimately used for a different purpose because of the disaster. With so many complexities involved in these new rules, we recommend speaking to the plan’s legal counsel for guidance.

Q: We recently had a participant ask if they can repay their 401(k) loan early. Honestly, this has not come up before. What should we consider in making a decision? Because of the way loan repayments are applied in our system, we expect there would be difficulties just in terms of the technology?

A: This is a question in which you will need a legal opinion. However, there are a few key considerations to consider — and systems difficulties aren’t really at the top of the list. Similar to other questions about qualified plans, meeting the prudent person test should come first. Maybe the participant realizes the interest he or she is paying back to his or her account is less than the account could earn if invested. Failing to allow the loan to be repaid could give that participant a reason to look to the courts for redress. Another potential problem could arise if the participant is not allowed to repay the loan in its entirety and later defaults. That, too, could create a fiduciary breach. Remember, mere functional procedures (as opposed to those that are specified in the Plan Document, the Summary Plan Description, or other governing documents) are just not as important as is prudence in operating the plan. So if the prudent thing is to allow prepayment, then that’s what should happen in spite of any technology challenges. Here’s an interesting discussion on the topic, which appeared on BenefitsLink: https://tinyurl.com/BL-LoanPrePay.

Q: We weren’t able to keep everyone employed during the pandemic, even though the business has continued with a skeleton crew. Unfortunately, we don’t expect to be in a position to rehire everyone for some time. Some of our employees are telling us that they are less confident now that they will be able to retire on time. Is that what you’re hearing from other companies? 

A: Yes, retirement confidence has taken a hit for many because of repercussions of the pandemic. A January 7, 2021, article on Kiplinger’s summarized a poll they conducted with Personal Capital, a wealth management firm. In that poll, 43% reported less confidence in their ability to retire comfortably as a result of COVID-19. Forty percent said their confidence level has not changed, though. What are people planning to do about it? About one-third of them (34%) said their plans have not changed. Thirty-five percent said they expect to work longer, 34% plan to save more, and 20% said they will revise their activities and/or travel in retirement so it will be less costly. The poll shows that just over 34% said they took a distribution from a retirement account and 27.4% took a loan. Nearly one-third (32%) said their withdrawal was between $75,000 and $100,000, and 31% borrowed in that same range.

For plan sponsor use only, not for use with participants or the general public. This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.

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