Although many employers plan to make changes to their retirement plans to take advantage of employee-friendly CARES Act provisions, public agencies should not blindly adopt recommended changes without thinking about the steps involved.
The last Focus on Public Benefits post described the availability of coronavirus-related distributions and the fact that employers need to decide whether to make these available. A number of recordkeepers and third party administrators for public sector-defined contribution plans (typically, 457(b), 401(a) and 403(b)) indicate to us that they are in the process of issuing CARES Act guidance and asking customers if they want to amend plans to offer some or all of the CARES Act provisions. There are many considerations in determining whether or not to amend these plans — including that the extra work you take on is meant to ultimately assist your employees in need. Things to consider:
- Are these plan changes subject to “meet and confer” requirements? In California, public agencies with MOUs are required to at least offer to their union partners the opportunity to meet and confer over employee benefit changes, even if the changes are all more favorable to the affected employees. Have you consulted with your labor attorney to make sure you have complied with applicable requirements?
- Who has the authority to amend your plan? Although your plan recordkeeper is reaching out to its contact within your organization – typically, a payroll or HR manager – and asking them to complete an “election” form that will effectively notify the recordkeeper of your organization’s decision to amend its plan, does that person have the authority to make a plan amendment or a plan design change? Almost all plan documents contain boilerplate language stating that the employer has the right to amend or terminate the plan. Generally, this means your agency’s governing body has to approve plan amendments, unless it has explicitly delegated some amendment authority to another, such as the city/agency manager or the plan administrator. As a result, most of the CARES Act and SECURE Act changes will need your governing body’s approval. Ideally, this should occur before any plan changes are implemented.
- Have you analyzed the administrative burdens associated with these changes? Many employers will want to make these changes to help their employees through these difficult times. However, employers should not change the operation of their retirement plans, unless they are capable of managing the new and additional plan administration requirements associated with such changes. Even with the help of your plan’s recordkeeper, you may need to reach out to participants, obtain and maintain their new elections (e.g., to request a CRD), and keep adequate records of administrative changes relating to these requests (e.g., new deferred payment dates for participant loans). Many municipalities are extremely busy dealing with keeping critical city services up and running. So, plan sponsors need to carefully weigh whether now is the time to complicate their HR functions.
- Many of the new rules are much harder to administer if you have multiple plans. Both the new CRD rules and the new liberalized limits and repayment rules for participant loans include plan aggregation rules that require the plan administrator (essentially, your agency) to aggregate and monitor the total amounts of CRDs or loans that an employee has taken or has requested to take from the plans. In many cases, a city’s multiple 457(b) plans are record kept by different vendors who may not be communicating with one another – and may not be coordinating limits. If you are in this situation, it will be up to you, the employer, to keep track of the overall limits to make sure that a given employee is not withdrawing or borrowing too much from his or her various plan accounts.
- You’ll need to revisit plan policies, prior loans and withdrawals, and current plan provisions. You may have already made several 457(b) plan distributions based on the pre-existing unforeseeable emergency hardship rules. If so, these distributions, if made in 2020, may be eligible for treatment as CRDs. It might also be possible to treat them separately – under the old rules and under the new rules. We will need further guidance on this issue. If you have already been making participant loans, certain outstanding balances will have to be counted against the new CARES Act limit. You also will need to revisit your loan policies (and perhaps revise them), particularly if they limit the number of loans to one. As mentioned above, the new CARES Act loan limits generally apply to all loans taken by an employee from all of your plans. Finally, changes such as the new participant loan rules under the CARES Act will require you to add a participant loan provision or feature to your plan this year, if your plan currently does not provide for loans.
Many public agencies will be in a rush to make changes in their retirement plans to give their employees greater access to their retirement savings. Because each agency may have different requirements and conditions for adopting plan amendments and plan operational changes, care should be taken so that any changes are made properly.
Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at email@example.com or (916) 329-3685.