Employee Benefit Plan Issues in the Age of COVID-19
July 20, 2020
We conclude this four-part series on employee benefit plan issues with Denise Finney who discusses the need for the timely remittance of participant contributions, possible delays, plan safe harbors, and a look forward at the employee benefit plan ecosystem in the new normal.
DP: So in this COVID-19 impacted economy, it seems like time is of the essence when it comes to liquidity, whether that's personal or commercial. So what are the rules regarding remitting participant contributions?
Denise Finney: The timeliness of participant deferrals continue to be a hot topic for the Department of Labor and the Internal Revenue Service. Under ERISA, participant deferrals must be remitted to the plan as of the earliest day they can be reasonably segregated from the employer's general assets.
So in other words, participant deferrals need to be remitted to the plan as soon as possible. The general consensus is to look at how soon payroll taxes can be remitted, which is typically within one and three days after employees are paid.
DP: Is there any kind of safe harbor available?
DF: The DOL has provided a safe harbor for small plans, which are those with less than 100 participants. So for small plans, if a participant's deferrals are remitted within seven business days after the pay date, the payroll deferral is considered to be remitted in a timely manner.
But for large plans, those with 100 or more participants, there is no safe harbor. The DOL has spoken at numerous employee benefit plan conferences over the years, stating that there is no safe harbor rule for large plans, as they believe large plans have more resources than small plans and can remit those deferrals sooner than the safe harbor seven business days for small plans.
DP: Okay. So why should employers be concerned about remitting participant deferrals to the plan in a timely manner ?
DF: For several good reasons. Under ERISA and the Internal Revenue Code, an untimely remittance of participant contributions is considered a prohibited transaction. And it's deemed to be an interest-free loan from planned participants to the employer who is sponsoring the plan.
And there's a cost associated to the employer to correct their mistake. The employer would need to make participants whole by calculating and depositing lost earnings into the plan for the participants affected.
There's also an excise tax, which is a penalty of 15% of the lost earnings. In addition, late remittances may trigger an audit of the plan by the Department of Labor or the IRS. The plans annual Form 5500 filing includes a question about whether or not there was a failure to transmit to the plan, any participant contributions within the time period prescribed by ERIRSA. And it's the responsibility of the person signing the Form 5500 to answer truthfully, as they are under penalty of perjury.
There can also be a negative impact on employee relations. Employees who can see their money was not remitted timely to the plan will most likely be upset with their employer, and they may report their employer to the Department of Labor for being late.
DP: Okay. So a lot of good reasons there. Having said that, do you expect to see delays in remitting participant contributions to the Coronavirus? And if so, what are we talking, days, weeks, months?
DF:We would expect to see some delays, especially for companies who laid off or furloughed their payroll staff, or employers who relied heavily on manual processes and needed time to figure out how to perform their duties remotely. There may be a temporary delay. I wouldn't expect it to take weeks or months for an employer to figure it out.
On April 28th, the DOL issued EBSA Disaster Relief Notice 2020-01, which states that the Department of Labor will not, solely on the basis of a failure attributable to the COVID-19 outbreak, take enforcement action with respect to a temporary delay in forwarding such payments.
They want employers to comply as soon as administratively practicable under the circumstances. And they warn employers and service providers to act reasonably prudently, and in the interest of employees.
DP: Okay. We learned a lot over these last four sessions about employee benefit plans and how the Coronavirus has impacted them. So I think it'd be a good idea to conclude this series with a longer look forward. Hopefully one day we'll get back to some sense of normalcy.
So how do you envision this public health crisis changing the future of employee benefit plans, both for companies and participants to apply that overused phrase, "What will the new normal look like and how should we prepare?"
DF: What we've learned so far is that employees are still saving for retirement. They're focusing on managing their budget, and are seeing a reduction in their expenses by not going out to eat, not going on vacation. I used to fill up my gas tank twice a week. Now I tease that I'm getting two months to a tank.
We see a small percentage of participants taking COVID-19 related loans and distributions. And as more companies resume operations and the unemployment rate decreases, it's a great time for employees to focus on building their emergency fund, manage their budget, and start saving more for retirement.
It's not enough to rely on social security. Retirement conversations that were gaining momentum before COVID-19, they will resume, including possibility of allowing a 401k match for student loan repayments and providing more investment and distribution options for participants nearing retirement age.
We'll see employers focusing more on understanding and updating their plan document, especially with regards to the Secure Act and the Cares Act provisions. Employers will want to understand their fiduciary responsibilities and create a plan committee to oversee plan operations, monitor service providers, fees, and investment performance.
More emphasis will be placed on ensuring contributions to the plan are accurate, complete, and remitted timely, as well as providing information and education to participants.
DP:Well, Denise, there's very few people better than you who can talk to this subject. So thanks for all of your expertise and your unique insights.
DF:Thanks so much, Dave, for having me. It's been a pleasure.
DP:And thank you for listening to the EisnerAmper Podcast series. Visit eisneramper.com for more information on this and a host of other topics. Join us for our next employee benefit plan series where EisnerAmper expert, Brenda DeSaro, will continue the conversation about employee benefit plan issues in the age of COVID-19.