Dear Actuary: What are demographic and longevity risks?
A primer for plan sponsors on demographic and longevity risks and how they affect public pensions.
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Jeremy Engdahl-Johnson: Hello, and welcome to Critical Point, a podcast brought to you by Milliman. I'm Jeremy Engdahl-Johnson, from Milliman's Media Relations team, and I'll be your host today. In this episode of Critical Point, we're going to be talking about the CARES Act and what it means for retirement plans. CARES Act stands for Coronavirus Aid, Relief, and Economic Security Act.Joining us today are Ginny Boggs, principal and senior regulatory compliance consultant in the Dallas office of Milliman; and Charlie Clark, Milliman's employee benefits (EB) research director. Just one production note: with everyone working from home, we're recording this podcast via Zoom, so we apologize if this isn't the crystal-clear audio you're used to from Critical Point. We do promise the content is the sort of high-quality information you expect from Critical Point. With that, I'm going to welcome our two guests today. Hi, Ginny.
Ginny Boggs: Hi, Jeremy.
Jeremy Engdahl-Johnson: Hey, Charlie.
Charles Clark: How’re you doing, Jeremy?
Jeremy Engdahl-Johnson: Doing all right. So, we had some very fast-developing regulations pertaining to retirement plans. I think Charlie and I were just recording a podcast on the SECURE Act all of two or three weeks ago, and here we are in a completely different situation, so I'm glad we could all come together to talk a little bit about what this means for retirement plans. Ginny, I want to start with you. There are a lot of provisions here that have implications for defined contribution plans. I'm wondering if you could give us a high-level view of what those changes are.
Ginny Boggs: Absolutely. And just to clarify before I get started which types of defined contribution plans this would apply to, it would be any qualified plan, which would be a profit-sharing, a 401(k) plan, a money purchase pension plan; in addition, 403(b) plans, and also governmental 457(b) plans. So it runs pretty much the gamut of defined contribution plans. And what the CARES Act does for defined contribution plans is it gives some distribution and loan relief to what the law calls "qualified individuals." And that would mean either participants or their spouses or dependents who have been diagnosed with coronavirus disease. It also includes-- and this is some very welcome relief-- some relief for those who perhaps don't have coronavirus disease, but are affected by it. That would be participants who are being quarantined or furloughed or laid off due to what's happening in the world with the coronavirus. Maybe they've had their work hours reduced; to be qualified for this. Being unable to work, due to lack of childcare, or, if they're a business owner, the closing or reducing of their hours for the business they own or operated. So that's who would qualify.
So, what type of distribution and loan relief would they get? On the distribution side, as you all know, there are certain restrictions on taking money out of the defined contribution plan while you're still working for the employer. The rules generally would restrict that unless you're age 59½, or other specific types of hardship withdrawals. But the CARES Act opens it up. It gives a lot of relief in this regard. It will allow a qualified individual to take an in-service distribution of up to $100,000, as long as they take that out by December 31, 2020, even if they would not otherwise qualify for a distribution under the plan. It also waives the 10% early distribution penalty for individuals who haven't yet reached age 59½. These would not be considered, under the tax rules, rollover eligible, which is good news for the withholding aspect, because if a participant takes out this type of coronavirus-related distribution, the otherwise applicable 20% mandatory withholding would not apply. Instead, it would be 10% elective withholding.
There generally are also certain notice requirements that a participant would normally have to receive, generally explaining to them what their rollover rights would be. Of course, that doesn't apply to these, because these won't be rollover eligible, so we don't have to worry about giving that type of notice when they need to get money in a hurry. And they must-- this is good relief here: The individual has to certify that they are a qualified individual, one of the short list that I gave you earlier, that are affected by the coronavirus. So the good news for plan sponsors and plan administrators, in that regard, is that we don't have to ask them for documentation and proof that they are a qualified individual. The participant can merely self-certify that they qualify for that.
On the personal income tax side, any qualified individual who takes out one of these types of distributions will be able to spread out the taxable income over three taxable years, and they work that out on their own personal income tax return. And they would also even have the ability to pay this distribution back into what's called an eligible retirement plan over a three-year period, in order to be able to get the same relief that they might be able to get if they were to make a rollover to a plan. So, over a three-year period, they could potentially pay that back into the same plan they took the distribution from, or perhaps, down the road, if they're no longer working for the same company, roll that into an IRA, in order to get that type of tax treatment.
On the participant loan side, for qualified individuals, the CARES Act will let them take a loan up to double the normal limit, as long as they take that loan out within six months, 180 days from the time that the CARES Act was enacted. So, what that means is that a participant can take up to 100% of their vested account balance as a plan loan, or less, up to $100,000. So those are double the normal limits. Another good aspect of the CARES Act, more participant loan relief, is that, for a qualified individual, it permits them a delay of up to one year for making their loan repayments if their loan repayments have due dates that fall between the date that the CARES Act was enacted, through December 31, 2020. So that's some very welcome relief. Particularly, most defined contribution plans require that loan repayments be made out of payroll deduction, and, of course, if participants are not being paid because of being laid off, furloughed, what have you, or if they're being paid at a much-reduced rate due to reduced work hours, very, very welcome relief. And not only do they not have to pay a loan payment when it's due, they're also not starting the clock of when that loan will go into default, and of course incur taxation. So, again, very welcome relief there.
As far as when they actually return to work or have their hours increased, any subsequent repayments will be adjusted to reflect the delay in the due date-- the original due date-- along with any accrued interest during the period of delay. In other words, while they get the delay for making their loan repayments, interest will continue to accrue. And then, after the one-year period, the loan will be re-amortized. The good news there is that the normal limit on the loans, generally no longer than five years for repayment term, the CARES Act is allowing a one-year delay. So in other words, if I took a loan today, essentially, I could have six years to repay, not five years, and my first loan payment I could delay up to one year from the date that I take the loan. So that's extremely good news for plan participants who are in extreme need of getting some money out of the plan to help them with their current situation.
One last thing for the defined contribution side is some required minimum distribution relief. Generally, that would apply to individuals who are over 70½. There was a law change that took effect last year, that now generally would kick in at age 72 for required minimum distributions from their defined contribution plan, but the CARES Act waives required minimum distributions for defined contribution plans for 2020, and that's for 2020 only. Any distribution that would be otherwise a required minimum distribution that is paid in 2020 will not be treated as a required minimum distribution. This would also include RMDs that were due for 2019, whose required beginning date was April 1, 2020. And so those may have already been paid. Individuals who receive that actually will be able to get some tax relief on that.
For 2020, any portion of a distribution that would have been treated as a required minimum distribution absent this temporary waiver under the CARES Act is eligible for rollover. However, the 20% federal income tax withholding will be ignored for 2020, and the distribution is exempt from the normal notice requirements of rollover rights for that distribution. Jeremy Engdahl-Johnson: Thanks, Ginny. Sounds like welcome relief to people who've been affected by the coronavirus. We're going to dig more into some of the DC implications, but, Charlie, why don't you take us through what this means for defined benefit plans?
Charles Clark: Sure, Jeremy, and thanks for the invitation to speak to our listeners today about this. Now, kind of in general, the defined benefit world, there are hundreds of billions, if not trillions, of dollars invested in it. So any time there's any change in legislative actions, new laws, it kind of ripples, and it affects all of the participants in the plan. Now, we've been looking at only single-employer plans here; that means plan sponsors who are not part of larger, collectively bargained trusts.
And just to contrast that to who actually qualifies for some of the relief I'm going to discuss, single-employer rules don't have to have qualification issues, like Ginny was speaking about for individuals. What happens here is that there's been two pretty specific changes in defined benefit law. First, I want to emphasize that they're voluntary actions. And next, I'll just go through what happens. So, the first one is the delay of any payments that are required under the tax laws to defined benefit plans for the rest of calendar 2020. And that's important to note, because many employers were going to have to put money in as early as in two weeks, on April 15th.
But what this deferral permits any plan sponsor from doing-- and might be because of cashflow issues. We know that in the business press we've been reading about, cash is precious. Dividends are being cut. Perhaps savings plans are going to have their matches curtailed, as well, because they can. This prevents an employer from incurring any of the penalties that they would've otherwise incur if they didn't make their on-time contributions. So, regardless of whether your contribution was due for the plans that actually have a starting date in 2020, or for those plans that had a starting date in 2019, and, as permitted by the law, can actually defer them to sometime in this year, those contributions don't have to be made until January 1, 2021.
Now, just for our listeners, what's important about that particular date: one, January 1, 2021, is not only a federal bank holiday – it's also a Friday. So the first time that you actually might be able to get them, if you don't take action sooner than that, is perhaps Monday on January 4, 2021. The second big item is another voluntary election by a plan sponsor. And as we've talked over the years about how the relationship between the assets and the actuarial liabilities exist, and typically referred to as the funded status, the employers actually have the ability to elect to use a funded status from the plan year 2019. And the reason that they'll be able to do this is because there are certain funded ratios at certain levels, particularly when the ratio of assets to the liabilities is 60% or 70%. There are certain provisions within the law that prevent a plan sponsor from making certain distributions. In particular, it's seen as a dampening or a complete halt of what's typically known as lump-sum distributions. So, again, the plan sponsor has the ability here to make a voluntary election to use the 2019 funded status for purposes of what's known as benefit restrictions in 2020.
The last item I'll mention-- and I know Ginny was mentioning required minimum distributions for savings plans-- there's nothing at this time in the new law that puts a halt on required minimum distributions for these single-employer pension plans. So that's kind of the quick wrap-up, Jeremy, of what are the two new pieces of law for single-employer defined benefit plans.
Jeremy Engdahl-Johnson: Thanks, Charlie. Ginny, I want to hear a little bit more about what this is going to mean for plan sponsors. I've heard this referred to as something of a defined contribution call to arms. How are plan sponsors likely to take this rule and respond to it with their DC plans?
Ginny Boggs: I think that most plan sponsors will want to offer these voluntary provisions, particularly because participants are already asking for it. They're asking their employers, the plan sponsors, "Can I take money out of my plan?" They're asking Milliman. They're calling our call center. They're needing a way to get some money, so that they can pay their bills and get by during the crisis. So employers are very, very interested in adopting these voluntary plan provisions to help their employees, to help the plan participants get some access to their defined contribution account balances. So we see some very positive responses from our clients, the plan sponsors, wanting to go ahead and, just as soon as possible, allow their participants to get access to their account balances. We are working very quickly to be able to respond to that for our employers, our plan sponsor clients, and their employees.
Jeremy Engdahl-Johnson: And you said we're trying to make these changes quickly. I'm curious what that means, and what the timing looks like. How quickly are plan sponsors able to enact these changes?
Ginny Boggs: We are in the process of getting the systems ready. That is underway. And the plan sponsor actually has quite an extended period of time to adopt a plan amendment, if they allow these. They have until the end of the 2022 plan year, so they have quite a bit of time to amend the plan. Right now, they simply have to tell us they want to do this. And, of course, we'll record their intent, and they can document it internally in their retirement plan committee minutes, so that they have that documentation on their end. But amendments are way down the road, so right now we're in an emergency situation. They just need to tell us, and we will get that implemented for their plan participants.
Charles Clark: Picking up on what Ginny just said on the single-employer plan, we're starting to hear questions about what our clients should do or may want to do, and we're responding to them similarly to Ginny. I suspect that the call to arms to do things very quickly on defined benefit plans doesn't have the same expediency or emergency on the defined contribution side, as folks probably need this because, as Ginny said, there's some bills to be paid, and other things. And I do agree, also, with Ginny, with her comment about the amendments to these plans. They're kind of down the road. But the one thing that we ask plan sponsors to do is to make some type of information directly available to us, as their business partners, so we're making sure that we make the changes and make these permissible distributions. So-- and in fact, one of the things that's actually in the new law is some extraordinary authority that's been given to the Department of Labor, to delegate authority to plan sponsors to do certain things. And the certain things include making sure that participants understand the disclosures that they're required to give. We think, but we don't have, direct information at this time that the Department of Labor will somehow delay some of the normal filings that we have at this time. We think it could cover participant disclosures, such as quarterly statements on the DC side. It could also include some disclosures on the defined benefit side. But one of the things that we want to make sure that we don't do is stop the work until DOL actually says this. One of the things that we are speculating about is, somehow there'll be some type of trickledown effect here in communications between the federal agencies and plan sponsors. Ginny pointed out to us that some other filings that her and many of our other colleagues have been working on to make submissions on plan documentation have actually been suspended and deferred till either June 30th or July 31st. I won't go into the details of what they are, but I have some optimism that the Department of Labor will start to get information out to us and give us some formal guidance.
Jeremy Engdahl-Johnson: We've talked a little bit about the need for quick relief, and certainly we're seeing that on the DC side. Ginny, what are some of the longer-term implications of this? Normally, I... not that we would discourage withdrawals from your retirement savings, but maybe not a best practice. But clearly, people need help now. So, what does this mean, longer-term, and what can plan sponsors do to help ensure that people get the help they need now, and that they're also going to be in an okay position in the future?
Ginny Boggs: You know, longer-term, obviously, for years and years, we have been helping our plan sponsors to be able to provide retirement benefit programs that will provide a secure retirement for their employees, their plan participants. And unfortunately, when the need for the participants to get access to their retirement plan accounts the most right now, during this economic crisis for many of them, where they don't have any paychecks coming in, or don't have the same income they had coming in, this is when the prices-- the stock market prices-- are down. This is when the 401(k) accounts, the 403(b) accounts, the profit-sharing account values are down, because that is the nature of a defined contribution plan. Ultimately, when the participant retires, the amount of money they have for retirement is their account balance. Right now, their balances are down. The worst time to withdraw money, from that aspect, is when the value of the mutual fund shares that it might be invested in are reduced. So that's going to not only deplete their retirement account, it will also deplete it at a time that's worse to withdraw money. So that's a tragedy, but it is the reality.
You know, in the future, when the economy recovers, when people are back to work, when the stock market is doing well again, you know, I think the main thing is, the account values will increase over time. Most of 401(k) plan participants, investors, and 403(b) plans, et cetera, are in this for the long-term investing, you know? The retirement may be many years down the road for them, so not to get discouraged, and, when things are back to normal, to continue to save in their 401(k) plans, in their 403(b) plans. We have seen, unfortunately, many plan sponsors not being able to continue to make matching contributions or their profit-sharing contributions. They're having to suspend those for now. But we often see that, when the economy is well, employers want to put more in than maybe they had before. So, eventually, we will see participants saving again by the way of elective deferral contributions in their 401(k) plan. Employers will probably re-implement their matching, re-implement their profit sharing, perhaps at increased levels, to help make up for the harder times. So there are some long-term implications, but I think that we will come out of this, in the end, with a good outlook for the future.
Charles Clark: And just to add to what Ginny's saying, one of the things that we obviously have no proof of yet, but if we look in the rearview mirror instead of looking forward just for a second, we did see, with the financial market meltdown of 2008-2009, that there was a substantive number of delayed retirements, and that meaning that perhaps folks had saved enough, had everything lined up-- their DB plan if they had one, DC plan, and social security-- that they were going to retire, say, in the next five or six months. And what statistics show is that there were an awful lot of deferrals of their retirements, probably taking place over 18 or 24 months, so not until 2010 and 2011. What I hope we will not see is a repeat of that, but we shouldn't be surprised by it, as well. And the other thing that I'm interested in seeing as this plays out, one of the things that we do know is that deferrals to savings plans by participants are completely voluntary, and whether or not we'll see folks actually opting out of them, which means they're not deferring the federal taxes or the state taxes; they're taking it in salary, and obviously paying tax on it. So we're hoping that we don't see that, but we shouldn't be surprised if that does happen, as well.
Jeremy Engdahl-Johnson: Well, thank you, Ginny and Charlie, for joining us. You've been listening to Critical Point, a podcast from Milliman. To listen to other episodes of our podcast, visit us at Milliman.com.
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Critical Point Episode 24: What the CARES Act means for retirement plans
The CARES Act has sweeping implications for both defined benefit and defined contribution retirement plans in the U.S., as Milliman’s Charles Clark and Ginny Boggs discuss on this episode of Critical Point.