Considerations for Employee Benefit Plans Amidst COVID-19

In these uncertain times, and with the new distractions that can be caused by remote working, office closings, social distancing, strain on businesses and production, and just plain fear, plans are impacted, too….

The value of plan investments is fluctuating like never before, and participant concerns are at an all-time high. 

Certain plan-related repercussions are noted below:

• Plan sponsors may be experiencing reduced revenue, losses, a compromised supply chain, and concerns over business continuity.
• Plan participants may be requesting additional participant loans and/or defaulting on existing participant loans. Similarly, plans may experience an increase in participant in-service distributions, and distributions may be requested by terminated or retired participants who historically have kept their funds in the plan. The outflow of investments for these reasons, along with investment losses, may heighten awareness of expenses necessary to operate plans.
• Many plan sponsors may reduce or eliminate employer contributions to defined contribution plans, be unable to make contributions to defined contribution plans, or refrain from making required minimum contributions to defined benefit plans.
• Plans may be terminated or frozen (eliminate benefit accruals or close to new participants).
• Partial plan terminations may occur as companies downsize. Generally, a partial plan termination may occur when 20% or more of participants are terminated. Any time a significant reduction in workforce occurs, prepare an analysis to determine whether, based on the facts and circumstances, a partial plan termination occurred.
• Plan sponsors may be challenged to deposit participant contributions into the plan in a timely manner. This may necessitate reporting such untimely deferrals to the Internal Revenue Service and Department of Labor.
• Plan sponsors may be unable to meet the customary Form 5500 filing deadline. Alternately, the due date may be extended and the revised filing date may prove challenging with other plan sponsor responsibilities.
• Plan sponsors may compensate employees in various ways that are different than traditional compensation and fail to refer to the plan document to determine if such forms of compensation are included or excluded from the definition of compensation used to calculate employee and employer contributions. Improperly including or excluding types of compensation in contribution calculations leads to an operational defect that must be corrected.

Plan financial statement disclosures may be necessary given the uncertainty of the markets and the financial/operational wellbeing of the plan sponsor. Below is a draft of what such disclosure may look like.

The extent of the impact of the COVID-19 outbreak on the financial performance of a plan’s investments will depend on future developments, including the duration and severity of the outbreak and its impact on the financial markets and the overall economy, all of which are highly uncertain and cannot be predicted. If the financial markets and/or the overall economy are impacted for an extended period, the plan’s investment results may be materially adversely affected. 

A prolonged widespread epidemic could adversely impact global economies and financial markets resulting in an economic downturn that may disrupt the demand for a plan sponsors goods and/or services. Such disruptions could adversely affect plan sponsor profitability, cash flows, financial results, and the ability to make required plan contributions. 

Additionally, plan sponsors will have to consider the extent to which COVID-19 may impact the plan sponsor’s financial results and disclose the estimated amount or range of such impact or that such impact is uncertain or cannot be estimated in the plan’s financial statements.