Retirement plan providers are rolling out expanded retirement plan distribution and loan options rapidly. Employers and recordkeepers are wrestling with whether notice to participants is required and, if not, what notice should be given. Employers want to take care of employees who are sick, laid off, or have other immediate cash needs. However, they are also weighing the risk that some participants will see an easy opportunity to take cash out “penalty free.” It may not be in the employees’ best interests to liquidate their investments and take $100,000 out of retirement savings if they don’t have immediate cash needs.
The CARES Act does not include any specific or additional notice requirements. If an employer does offer the expanded distribution and/or loan options, then it must issue a Summary of Material Modifications (SMM) or an updated Summary Plan Description (SPD) to participants and beneficiaries. However, an SMM or SPD generally is not required to be issued until 210 days after a plan change is “adopted.” At the earliest, plans would need to issue an SMM or updated SPD describing additional distribution and loan options by July of 2021.
But beware – expanded loan and distribution options are only available during 2020. The best practice is to notify participants and beneficiaries of expanded distribution and loan options sooner rather than later. Plan sponsors may also want to caution participants and beneficiaries to carefully evaluate whether they meet eligibility requirements based on sickness or financial need. They should also be encouraged to consider whether taking a loan or distribution at this time is in their best interests over the long term given the current volatility of financial markets and the negative impact such action will have on retirement savings.
401(k) Safe Harbor Plans must issue an updated Safe Harbor Notice if plan changes are made in the middle of a plan year. This is because a change in withdrawal/distribution options changes the information required to be in the Safe Harbor Notice (see IRS Notice 2016-16). The updated notice is supposed to be issued at least 30 days before a change becomes effective, unless there are extraordinary circumstances (e.g., a coronavirus pandemic). So, if Safe Harbor 401(k) Plans are modified to expand distribution and loan options, an updated Safe Harbor Notice should be issued to participants and beneficiaries as soon as possible.
Learn More: Benefits Management During The Covid-19 Crisis
Your Employee Benefits Plans – What You Need To Think About Right Now
CARES Act – Retirement Plan Loans & Distributions Relief For Employees