A roundtable discussion with Chris Garrison of Plan PILOT and Dave Mauger of New Pinnacle Consulting Group
Net Assets: What parts of the CARES Act retirement plan changes are most important for independent schools — what should school leaders take note of?
Chris Garrison: The CARES Act does two things. It provides greater access to 403(b) assets, and it allows former employees age 70.5 or older to put off their required minimum distribution and avoid cashing out a portion of their account in a down market.
So, employees can take up to $100,000 from their 403(b) plans without an early withdrawal penalty and pay the taxes over three years. If they want to repay themselves, they can. Loans, if the plan offers them, are effectively doubled to a maximum of 100% of the employee’s balance or $100,000. If a plan doesn’t offer loans currently, it can add loans so that the CARES loans are available.
Additionally, the employee determines if they are eligible and “self-certifies,” so the plan sponsor has no role in figuring out who can access their retirement account, which is generally positive because they don’t have to get involved in processing the transaction.
Dave Mauger: It’s also important to note that plans do not have to adopt the CARES Act distribution or loan provisions.
Net Assets: What are the pros and cons of these changes, and what factors should schools consider when deciding whether or not to enact these changes?
Mauger: These provisions are without doubt a benefit to individuals feeling the financial impact of the coronavirus. Plan sponsors should keep in mind these distributions are available to all plan participants and for all sources of accumulations, however. And while the distributions may be repaid over three years, those taking the loans will likely not have the resources to repay them and will therefore miss any uptick in the stock market and potentially larger balances at retirement.
Garrison: Schools should always consider what is in the best interest of their participants and the fiduciary standard, and make their decisions after considering factors like their employee population demographics, the goals of the plan and the circumstance of the decision. Because employees generally find financial decisions difficult, schools should make sure employees have access to helpful resources like communications, education and counseling. For the school’s part, if employees hurt their retirement prospects, they may need to work longer, making workforce management, including hiring younger employees, more difficult.
Net Assets: Will these changes affect the plan audit?
Garrison: Auditors are likely to look at how the CARES Act provisions were implemented and test participant level transactions to ensure the plan was operated consistently with its terms and provisions. Beyond that, we wouldn’t expect the new legislation to have any impact to the plan’s audit.
Mauger: Agreed. There should be no impact as long as the plan is amended and changes are communicated appropriately.
Net Asset: How should the school document its consideration of changes for fiduciary purposes?
Mauger: We recommend executing a board resolution.
Garrison: Schools should document what they decided regarding the CARES Act just like they would with any other significant change to the plan. The decision-making process and considerations should be memorialized in meeting minutes written for the retirement committee’s documentation. Documenting the process is especially important with the CARES Act because the new rules needed to be implemented quickly.
Net Assets: If schools decide to enact these plan changes, what do they need to do, both within the business office and in terms of employee communications?
Mauger: Many of the larger record keepers are assuming plans will adopt the provisions and therefore are “opting in” all eligible plans unless the plan sponsor notifies them otherwise. So, the first step is to check with your vendor regarding their process.
Once final guidance is provided, the plans will need to be amended by the end of the 2022 plan year and a summary of material modification (SMM) must be distributed to all plan participants within 210 days following the end of the plan year amended.
Many schools have adopted a pre-approved plan document sponsored by the record keeper. In this case, the vendor will provide the amendments when final guidance regarding the Act is provided. If the school has not adopted a pre-approved plan document, the school is responsible for preparing amendments and SMM for the plan.
Employee communications regarding the distributions are optional at this time.
Garrison: A plan sponsor should review the CARES Act carefully, including with its recordkeeper, plan consultant and plan counsel. If using the recordkeeper’s volume submitter document, the recordkeeper should provide an updated document, which in turn should be carefully reviewed by the plan’s counsel. If using a custom document, the document should be updated by the plan’s counsel.
Plan sponsors, in conjunction with their recordkeeper and plan consultant, would do well to provide employees with a summary of the changes at this time, including their potential impacts to participants, how to take action and contact information. The communications should be informative and easy to understand and clarify there are short- and long-term implications for withdrawals.
Net Assets: Do you have any advice for employees who are considering taking a withdrawal?
Garrison: We recognize the extreme impact these extraordinary events are having on our plans’ employees and plan participants. With a longer-term view, however, we encourage employees and plan participants to consider the following in examining their specific circumstances:
- Consider whether other sources of funds, like emergency savings or a home-equity loan, are available to meet short-term needs.
- Consider a coronavirus-related distribution or coronavirus-related loan in an amount necessary to match their immediate needs only.
- Plan to repay the coronavirus-related distribution or repay the coronavirus-related loan to avoid income taxation, and to maintain their retirement planning; amounts withdrawn and not repaid will not be available to sustain their lifestyle in retirement.
- Maintain their current level of retirement savings now or as soon as they are able.
- Consider their investment strategy thoughtfully, and only make changes necessary to meet their long-term objectives.
- Engage with a plan-provided financial consultant from their retirement provider or their own financial advisor as needed to assist their decision-making and to avoid emotion-driven choices.
Mauger: We recommend individuals discuss their unique situation with a consultant or advisor prior to taking a withdrawal given the impact to their retirement accumulations.
Net Assets: If a school needs to make other plan changes, such as a change to its contributions to the plan, should those changes be made at the same time or is it okay to make changes in two stages?
Garrison: Best practice would say that all coronavirus-related plan changes be communicated to employees at the same time, but most likely, other more practical considerations will prevent that. It is definitely okay to make the changes in two stages if that allows your employees with real financial needs to quickly access money, while taking your time to better assess your school’s financial situation for the upcoming fall school season.
Mauger: Two stages are fine.
Net Assets: If the school wishes to lower or stop the school’s portion of the plan contributions, what steps does the school need to take, either now or later?
Mauger: Prior to the effective date of the change, the board should execute a resolution. For 403(b) plans, notifying employees in advance, 30–45 days if possible, is best practice. 401(a)/(k) plans are required to notify employees at least 45 days in advance. If your school stops contributions, you should notify your recordkeeper, especially if you are remitting employer contributions on a different schedule then the employee deferrals. Safe harbor plans have additional considerations that should be discussed with your plan consultant prior to decreasing or stopping employer contributions.
Once the resolution is passed, request a plan amendment from the vendor sponsoring your pre-approved plan document. They will provide an amendment and usually include an SMM. If the plan is not using a pre-approved plan document, the school will need to prepare the amendment and SMM. Distribute the SMM to all plan participants within 210 days following the end of the plan year amended.
Garrison: The response will depend on whether the plan has a safe-harbor employer contribution, when the plan year begins and how often the employer deposits contributions — every pay period, once year or somewhere in between.
Your plan will probably require an amendment to modify the amount of contribution that is defined there; some schools are moving to a discretionary contribution rather than defining the specific level in their document in order to allow them additional flexibility to change their formula without additional plan amendments. Additionally, employees should be notified before the contribution change takes place. Plan counsel should be consulted in order to ensure that the proper steps are being taken for your particular situation.
Net Assets: If the school does lower or stop plan contributions for FY21 (assuming a July 1-June 30 year), will the school need to make up the missed contributions in subsequent years?
Mauger: No, as long as the plan is amended to reflect the contribution change. When the school picks up with the employer contributions or wishes to increase the contributions, the same steps apply: board resolution, employee communication, amendment and SMM distribution.
Garrison: There is no legal requirement to make up any reduced or suspended employer contributions. The contribution changes are made prospectively (only applicable to future time periods) and since the level of employer contribution is not a fiduciary decision, there is also no “make up” requirement.
However, depending on the school’s financial situation, expressing a desire to make the lowering or suspending of contributions as brief as possible will assist in encouraging participants to maintain (or increase) their current contribution levels. In terms of communications, schools would do well to explain that employees either need to save more or modify their retirement goal when the employer is not contributing as much as they had previously.
Chris Garrison is a senior consultant at Plan PILOT. Contact him at chris.garrison@planpilot.com.
Dave Mauger is chief financial officer at New Pinnacle Consulting Group. Suzanne Spunzo is New Pinnacle’s director of client development and advocacy. Contact her at sspunzo@newpcg.com.
