A lot of speculation has swirled around what COVID-19 would do to retirement plan balances. The speculation was driven in part by the frequent and broad sweeping changes that were made to retirement plan regulations in an effort to help participants and employers stay afloat in 2020. While the pandemic has taken a toll on retirement confidence, the overall retirement plan balances were not affected. Although the stock market experienced major losses last March, it roared back during the rest of the year. It is our hope that recent extensions to some of the retirement plan regulations will provide continued support for employers and participants into the future.

At the end of March 2020, mass withdrawals were initially anticipated when the Coronavirus Aid, Relief and Economic Security (CARES) Act was passed into law. The CARES Act provided a lifeline to those negatively impacted by the pandemic by making it easier to access retirement plan balances through coronavirus-related distributions (CRDs) and increased participant loan amounts. However, many plan sponsors chose to not adopt the more liberal withdrawal provisions. Researchers at the Center for Retirement Research (CRR) at Boston College reported in February 2021 that among plans offering CRDs, only 7% reported that greater than 5% of participants utilized the option. In terms of the total number of loans and withdrawals, 25% to 35% of plans saw some increase in activity. In addition, the CRR research found only 5% of employers suspended or reduced their contributions to 401(k) plans.

The economic impact of the COVID-19 pandemic has put current financial wellness and future retirement dreams at risk for many Americans, according to LIMRA Secure Retirement Institute (SRI) research—especially for those who lost their jobs or a portion of their income. Among employees with a job disruption, nearly 70% say their ability to save was negatively impacted, while only 28% of non-disrupted employees reported a negative impact. Fortunately, the overall employee and employer 401(k) contributions remained relatively steady over the last year.

Unsurprisingly, analysis of the labor market highlights that one of the reasons the pandemic has had little effect on retirement plans is that many individuals experiencing unemployment are those with the lowest education levels, who are also less likely to save for retirement. Even prior to the pandemic, retirement plan participation was viewed as an underutilized employer benefit, with many of the active participants holding inadequate balances. It is estimated that only about half of all households approaching retirement have any retirement savings. Additionally, in a July 2020 study, only about 70% of workers reported having an emergency savings fund, a majority of which held less than 6 months of expenses. As a result, plan sponsors are encouraged to make sure workers keep both retirement savings and emergency savings as top-of-mind goals in order to prevent those without emergency savings from withdrawing money from their retirement accounts.

Looking Forward:

On December 27, 2020, the Consolidation Appropriations Act 2021 (CAA) was signed into law. The Act’s 2,100+ pages of content contained additional COVID-19 relief for businesses, individuals, and benefit plans. Significant retroactive modifications were made to the tax treatment of business expenses as they relate to the PPP loans that many businesses received during 2020. Notably, the CAA provided that in addition to the PPP loan forgiveness itself being excluded from income, additional deductions will not be denied, nor basis or tax attribution adjustments be required for related payroll and non-payroll expenses. The government also extended Employee Retention Credits for those employers who were able to retain employees during the shutdowns of 2020.

While the recent bill didn’t extend the time available for plan participants to take CRDs, it did add money purchase pension plans as a plan type from which participants could take a CRD. The provision was retroactive to the passage of the CARES Act. As a result, distributions from money purchase pension plans between January 1, 2020 and the Act’s expiration on December 30, 2020, have the potential to be reclassified by the recipient for personal income tax purposes.

A provision was enacted by the passage of the CAA which will allow for future distributions from retirement plans for participants affected by disasters, other than the COVID-19 pandemic, as declared by the President. Operating uniformly to the CARES Act provisions passed in 2020, participants in 401(k), 403(b), money purchase pension and government 457(b) plans will be allowed to take up to $100,000 in aggregate from whatever retirement plan accounts they own, without additional tax implications. Income tax on these distributions may be spread over three years, and participants may repay them into a plan that is designed to accept rollovers within three years. Participants will have until 180 days after enactment of the bill to take qualified disaster distributions, request a qualified retirement plan loan, or extend an existing loan repayment period. It is assumed that similarly to the CARES Act, plan sponsors will again be given the option to include the future distribution provisions when disasters are declared.

Partial plan terminations for specified retirement plan sponsors who laid off or furloughed employees due to the economic effects of the pandemic are also prevented through the passage of the CAA COVID-19 relief bill. In short, the provision gives companies until March 31, 2021, to rehire laid off workers and avoid a partial plan termination. The partial plan terminations can be avoided, if the number of active participants covered by the plan on March 31, 2021, is at least 80% of the number of active participants covered by the plan on March 13, 2020.

The recently passed stimulus bill also includes provisions related to employer benefits other than retirement plans. Now extended through the end of 2021, the CARES Act allows employers to make tax-free contributions of up to $5,250 per employee annually toward eligible education expenses, including tuition or student loan assistance, without raising an employee’s gross taxable income. In addition, the bill allows employers to extend the grace period for unused flexible spending account (FSA) benefits for 12 months after plan years ending in 2020 or 2021.

While COVID-19 has not significantly impacted retirement plans as initially speculated, there is still much to be done to encourage participation. Offering financial products that are easy-to-understand assists, rather than overwhelms the average participant. At Greenleaf Trust we strive to structure retirement plans that provide participants the best chance at meeting their retirement goals. Please reach out to a member of our team if you would like assistance with your company sponsored retirement plan.