Employee Benefit Plan Distributions Under the CARES Act
July 06, 2020
In this episode, Denise Finney, a partner in EisnerAmper’s Pension Services Group, discusses plan distributions under the CARES Act. She also talks about the option of taking loans against a plan and a possible spike in defaults. Denise concludes this segment with some plan distribution best practices for both companies and participants.
DP: Good. So we're here, we're at our third segment talking about employee benefit plan issues. So since this pandemic began, 33 million Americans have lost their jobs and these are numbers not seen since the great depression. So are you seeing a spike in plan participants requesting loans or distributions from their plans to help make ends meet?
DF: Yes, we are seeing an increase in the distributions and loans under the CARES Act. It actually allows for distributions up to $100,000 for participants who are affected by the COVID-19. The act also increased plan loan limits from 50,000 to 100,000.
It's up to each plan sponsor to decide which provisions, if any, they want to elect for their plan, but what we are seeing, and according to the data provided by Fidelity Investments, based on their plan sponsors, it supports this. Most of what they're seeing is the plan sponsors have elected the distribution provisions and approximately half of those plan sponsors elected to offer new loans up to $100,000, as well as the loan deferment for up to one year under the CARES Act.
And Fidelity's data also shows that there were $5.6 billion of CARES Act distributions from April 1st to May 8th. And that represents 1.5% of participants. From April 24th to May 8th, there were 67 million of new loans and almost 2% of loans were deferred.
DP: Now, traditionally advisors have suggested to participants if they absolutely need access to funds to go the loan route rather than taking a distribution from their plan. Does that advice still hold true?
DF: Advisors are recommending each participant to look at their particular facts and circumstances before deciding if a loan or a distribution is best for them. However, we are seeing a trend that taking a distribution has been the optimal choice for most participants. So the CARES Act waves the 10% early withdrawal penalty, and there are favorable tax terms. Participants can pay on the income from the distribution ratably over a three year period instead of all at once, DP:Now, with an increase in distributions from a plan, the flip side of that coin is do you predict a spike in loan defaults?
DF: Yes. So we do expect an increase in the loan default for those employers who have not allowed for loan deferments under the CARES Act. And for those who were able to defer their loan repayment, the question is, will they have the funds they need to start repaying their loan in one year?
DP:Okay. So if you're seeing this increase in distributions, new loans, potentially increase in loan defaults, you put all that together, what kind of ripple effects are you talking about? Both on companies and the economy as a whole.
DF: Employees may not have enough money saved for retirement. That's what it boils down to. And while that's no different than pre COVID-19, the current environment is making the outlook worse for employees. Taking a distribution, defaulting on loans, is an immediate decrease in the amount saved for retirement.
According to fidelity Investments, the manufacturing and healthcare industries represent more than 40% of the total CARES Act distributions. Employees in those industries may not have enough money saved for retirement.
DP: Okay. Definitely have to underscore that. So you've been doing this for a long time, Denise, and I know that one size doesn't fit all, but do you have any suggestions, best practices, for companies and plan participants when it comes to taking that distribution or a loan from a plan?
DF: For the plan participants, definitely speak to an investment advisor before taking a loan or a distribution from your plan account and know the overall financial impact of your decision. Being informed, have a plan in place to repay your loan or distribution so that your retirement savings isn't depleted.
For the employers, the plan sponsors, really be certain that your employees are provided the information they need to make that informed decision. Make sure the custodian, the record keeper, of your plan are available to assist your employees. And remember, you'll need to eventually amend the plan for the elections made. And for calendar year plans, the deadline to adopt the CARES Act amendment is December 31st, 2022.
DP:Okay. So certainly a big step in deciding to take a loan or a distribution. So definitely it pays to be informed about the options and what the ramifications are. So thank you, Denise, for that valuable information.
DF: Thanks, Dave.
DP:Thank you for listening to the EisnerAmper podcast series. Join us next time, when we wrap up our discussion with Denise on employee benefit plan issues in the age of COVID-19.