COVID-19 Client Alerts:
COVID-19 Effects on Retirement Plans You May Not Be Aware Of
Unemployment claims have reached historic highs. Many people have lost their jobs due to businesses not being able to remain open during the Pandemic. Many employers have terminated employees as a result of the downturn in the economy.
It is important to note that if a qualified retirement plan experiences a significant reduction in the number or percentage of employees participating in the plan due to employer-initiated action during an applicable period, then a partial plan termination may occur. If so, the affected employees who are not fully vested in their benefits under the plan when terminated, are required to become fully vested. With respect to a 401(k) plan, it is only employer matching or other employer contributions, that are subject to a vesting schedule, that are at issue since elective deferrals are always fully vested.
Whether a partial termination has occurred depends on all the facts and circumstances, although the IRS presumes a reduction of more than 20% of participants is a partial termination. However, this can be rebutted; for example, by demonstrating that some of those participants were just normal turnover.
The applicable period is generally the plan year, but employer-initiated action can span more than one plan year. For example, if the plan year is July 1 to June 30, and an employer downsizes by 10% in March due to reduced business hours resulting from the COVID-19 Pandemic and then terminates another 11% in July because of the Pandemic continuing, this could very well be a partial termination.
It is important for employers to be aware of this issue because if the partial termination rule is not followed, not only will the plan owe the affected participants additional benefits, but the IRS could actually disqualify the plan.
Plan Conversions and Blackout Periods
Retirement plans occasionally switch service providers, such as record keepers or bundled-platform providers because of high fees or dissatisfaction with the current service provider. During this process, plans must transfer the investment funds from the investments under the old version of the plan to those of the new plan. Often the new plan will not offer the exact same investment funds but will map existing investments to equivalent ones. To accommodate this change, plans that offer participant direction of investments must impose a blackout period, during which there is a temporary suspension or restriction on the ability of participants to direct investment changes, obtain plan loans, or take plan distributions. These periods vary in length from a couple of days to several weeks depending on the circumstances.
The current volatility in the stock market means that, from a fiduciary standpoint, now is not the best time to deny participants access to the investments in their accounts to make investment changes or to take loans or distributions, including hardship distributions or the new Coronavirus-Related Distributions and expanded loans. Therefore, to the extent possible, fiduciaries who were planning any type of conversion requiring a blackout period should consider whether such plans could be postponed until the market has reached a point where it has stabilized. Of course, there are a number of factors to be considered, such as how long the blackout period would be and the additional cost of such a delay.
Pooled Plans with Annual Valuation Dates
Some defined contribution plans pool all assets into one trust fund that is invested by the trustees. A participant's account balance is his or her share of the entire fund on a valuation date. Participant accounts are valued at least annually. When there is a distribution event, a participant's account is usually valued as of the last valuation date (ESOPs also use this approach when implementing a diversification election). However, these plans typically permit an interim or special valuation date to be imposed to protect participants when extraordinary circumstances, such as a significant change in economic conditions or market value of the trust fund, warrant it.
Before the Pandemic occurred, the U.S. stock market was very bullish. However, after the Pandemic hit, it experienced severe drops and has become quite volatile. The Dow Jones average dropped 23% in the first quarter of 2020, the worst opening quarter in history. This is definitely a significant change.
Copyright © 2020, Murphy Austin Adams Schoenfeld LLP. All rights reserved. Please be assured that we make every effort to make certain that the information contained in this alert is current at the time this email was delivered. Because laws and legislation are constantly changing, please contact us if you are unsure whether this material is still current. Nothing contained herein should be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents are intended to be for general information purposes only. We assume no liability in connection with the use of the information contained in this article. Given the rapidly evolving nature of legal and governmental responses to the COVID-19 pandemic, unfolding events likely will supersede many of the issues discussed in these updates. We encourage you to contact our lawyers directly for the most current information and counsel regarding legal and governmental responses to the COVID-19 pandemic. Please contact us to answer any questions you may have.
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