Guiding Your Employees Through COVID-19

By Jim Trujillo

The COVID-19 pandemic has had catastrophic effects on our public health and economy. Many businesses have felt the unbelievable impact this situation has had on their employees, their daily operations, and their companies as a whole. During these uncertain times, many employers are searching for answers on how to best safeguard their most valuable asset, their employees.

In times like these, when many businesses’ financial health is in jeopardy, tough decisions come to the forefront. For many employers, reductions in compensation, benefits, or employees are the last options they want to consider. However, over recent weeks these decisions have become increasingly more common and even more necessary for the future of their businesses.

Fortunately, the government has stepped in to assist employers during this disastrous situation. On March 27, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, into law. This $2 trillion package includes many provisions aimed at helping companies who were negatively impacted by the pandemic.

One of the major components of the CARES Act that employees are increasingly concerned with are the features for 401(k) participants seeking financial relief. 

First, it’s important to understand that these provisions only apply to “eligible” participants as it relates to COVID-19. Under the Act, eligible participants include individuals who:

• Are diagnosed with coronavirus
• Have a spouse or dependent diagnosed with coronavirus
• Experience adverse financial consequences as a result of a quarantine, furlough, lay-off, reduction in work hours, business closure, the lack of childcare, or other factors determined by the IRS due to the coronavirus emergency.

Unfortunately, with millions of Americans falling into one of those categories, there’s a vast need for employers to understand how the CARES Act can help their employees and their company. There are three key points to this legislation that directly impact employer-sponsored retirement plans.

1. DISTRIBUTIONS

With all the hardships many people are facing, the government deemed it necessary to relax some of the usual rules regarding retirement plan distributions. The CARES Act helped alleviate some of these regulations as it pertains to age, penalties, and tax withholdings.

In a typical situation, it is very difficult to take money out of a 401(k) plan before age 59½. And even when you can, you will have to pay a 10% penalty AND tax in the year it was distributed. This is where the CARES Act provision can help 401(k) participants.  For the remainder of the year, penalty-free distributions up to $100,000 can be made for those eligible participants, regardless of age. This means that individuals looking to take advantage of this benefit do not need to worry about paying the 10% penalty back to Uncle Sam.

Next, the typical mandatory 20% tax withholding on the distribution is waived. In other words, the amount a person requests is the amount given. But as the saying goes, “nothing in life is free”, and taxes still must be paid in most circumstances. The good news is there are additional options in how those taxes can be paid. Individuals now can pay the taxes on that distribution over the next three years, and not just in the year of the distribution as it typically would be required. Even better, individuals can avoid paying taxes entirely if the distribution amount is rolled back into a qualified plan or IRA within three years.

• LOAN RELIEF

For those eligible participants not wanting to take a full distribution, the CARES Act has provided some new flexibility with loans from 401(k) accounts. If a 401(k) plan provides loans as an available feature, participants are now eligible to a loan amount of $100k, or 100% of the participant’s vested account balance, whichever is the lesser of the two.

Additionally, regulations regarding the repayments of these retirement plan loans have been eased. Participants who already have a loan, and who are eligible, can now suspend repayment for 12 months.

• CARES ACT IMPLEMENTATION

Every 401(k) Recordkeeper and Third-Party Administrator (TPA) is handling the implementation of these new provisions differently. Many are allowing for negative consent which means if you say nothing then it will automatically be added to your plan. But this is not the case for everyone, and some are requiring a manual “opt in” before these features are implemented. Plan administrators should receive notification from their account manager or plan advisor about making this election.

(S. 3548 – The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) – 116th Congress (2019-2020) https://www.congress.gov/116/bills/hr748/BILLS-116hr748enr.pdf)

But the CARES Act isn’t the only legislation made specifically for employees during these uncertain times. The Families First Coronavirus Response Act (FFCRA) provides temporary relief to eligible employees affected by the COVID-19 pandemic through a new paid sick leave benefit (Emergency Paid Sick Leave Act or “EPSLA”), and an expansion of FMLA (Emergency Family and Medical Leave Expansion Act or “EFMLA”). (H.R.6201 – Families First Coronavirus Response Act – 116th Congress (2019-2020) https://www.congress.gov/bill/116th-congress/house-bill/6201/text)

These two pieces of legislation have certainly lessened the load for many Americans, but it may have shed some light on the need for a more focused financial resource in the workplace. As many employees try to grasp how these new regulations impact their benefits, HR managers have had to become immediate experts in these extremely complex arenas.

While no one could have forecasted this pandemic, it highlights the importance for companies to make their employees’ financial wellness a priority. Many companies are flipping the perspective of this negative situation and turning it into a learning opportunity for their workforce, and a support system for their HR teams, by partnering with professionals.

Whether it’s through benefits education, individual financial counseling, or planning for emergency situations, fiduciary financial advisors can act as a key ally for companies and their employees, especially in times of fiscal uncertainty. We are finding the HR partners we work with are much better prepared and more confident knowing they have a trusted resource that can help their employees, with only the employees’ best interest in mind.

Between the ever-changing landscape of this pandemic, carrying the burden of making crucial company-wide decisions, and being a knowledgeable resource for these vast new regulations (all while providing calm and collected employee support), HR professionals can understandably feel both isolated and overwhelmed. This work can be exhausting, but luckily no one has to go it alone.

One silver lining that has emerged from this challenging situation is the collective support of humanity, as people are coming together to help their neighbor in their time of need. Now more than ever, individuals are lending their knowledge and experience to help their fellow man. Governmental professionals, attorneys, and financial advisors are emerging as valued partners for Human Resources during these unsettling times. Lean on them to help lessen the load and guide you and your employees through this uncharted territory.  It’s what they do every day – and if they’re doing it for the right reasons, they will get just as much out of it as you and your employees will.