By Cara Kahan, RFC®, CEO, Lang Financial Group
The COVID-19 pandemic has employers stressed about both now and the future. Total infections in the US are nearly 22 million as of the writing of this article. The numbers highlight the unpredictability of the future course of this pandemic. In turn, there is growing uncertainty among business leaders about what are financial “necessities” for their business, presenting challenges for employers who still want to offer a comprehensive benefits strategy for their employees.
According to a survey conducted by Willis Towers Watson, approximately 12% of US companies have used the COVID-19 crisis to reduce or suspend their 401(k) match. Most of the companies in the worst-hit industries, including business services and retail, have made cost-reducing changes. A survey conducted by Pearl Meyer, a leading global consultancy and solutions firm, indicates that 16% of US companies are considering eliminating or reducing employer contributions to employees’ retirement plans.
COVID and 401(k): Some Employers Made Adjustments
Under the Coronavirus Aid, Relief and Economic Security (CARES) Act, many employers have modified their 401(k) plans. Almost 65% of respondents in another Willis Towers Watson survey increased access to in-service distributions from employees’ 401(k) accounts last year. Making cash readily available from existing contribution plans was a relatively affordable and quick way to provide benefits to employees during these tough times.
Under the CARES act, employers were able to build a plan to permit coronavirus distributions to qualified individuals in 2020. An amount of up to $100,000 was allowed per employee, with the 10% early distribution penalty removed. The benefits were applicable to eligible retirement plans including 401(k) plans, 403(b) plans, 457(b) plans maintained by government institutions, and Individual retirement accounts (IRAs).
What’s New for 2021
With some of the CARES Act provisions expiring, the Consolidated Appropriations Act of 2021 was passed. The COVID-Related Relief Act 2021 (COVIDTRA) was also passed as a result of the appropriations bill. It is designed to cover:
- Business loans
- New tax benefits
- Relief payments
- Unemployment benefits
Millions of Americans struggling during the pandemic will benefit from this act. However, the COVIDTRA doesn’t comprise as many law modifications or retirement changes as mentioned in the CARES Act.
The Qualified Disaster Distribution
Under the COVIDTRA, Congress passed new legislation building a retirement plan known as the Qualified Disaster Distribution. It allows you to withdraw up to $100,000 from retirement accounts and forego the 10% penalty tax. One can repay the amount or treat it as a rollover during the three-year period starting from the day the distribution was withdrawn.
Also, if the distribution is a part of a qualified employer plan such as 401(k), it will not be subject to the regular withholding rules.
Expanded Retirement Plan Loans
Plan loans can comprise 50% of the vested account balance up to $20,000. Under the CARES Act, it was expanded up to 100% of your vested account balance or $100,000, whichever is lesser. As a part of the COVIDTRA, Congress extended the CARES ACT expanded retirement plans in 2021.
Who Is a Qualified Individual for the Benefits Under the CARES Act?
As mentioned above, the coronavirus distributions and loan benefits are applicable to “Qualified Individuals” only. Therefore, qualified individuals include:
- Individuals diagnosed with the coronavirus by a CDC-approved test
- Individuals whose dependent or spouse is diagnosed with the coronavirus by a CDC-approved test
- Individuals experiencing severe financial issues as the result of being laid off, furloughed, quarantined, having reduced work hours because of the COVID-19 pandemic, being unable to work due to absence of child care due to the COVID-19 pandemic, or other factors determined by the Secretary of the Treasury.
It is not mandatory for employers to adopt the provisions defined by the CARES Act. However, a significant number have chosen to participate and make it more convenient for their employees to access their 401(k) account.