The Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law in March 2020, and expanded retirement plan provisions may have an impact on the 2020 plan audit season. It’s important to discuss adopted provisions with your auditor in advance in order to plan and identify potential risks. Most plans have until the end of the first plan year beginning on or after January 1, 2022 to amend their plans for the relief with all adopted amendments retroactive to March 27, 2020. Without formal written documentation, the auditor will have to gain a clear understanding of which provisions of the Act have been adopted.
Below are key areas of focus for the 2020 plan year audits:
Issues surrounding the definition of eligible compensation are the most common audit finding. During 2020, many employers experienced situations resulting in special compensation arrangements, layoffs, furloughs, and other payroll adjustments. The increase in off-cycle payroll or adjustments increases the risk that the plan will fall out of compliance with plan provisions. This will be a key topic to evaluate, and a discussion with your auditor during the planning process will help identify any areas that need to be addressed during the audit.
Timely remittance of contributions withheld from employee compensation is the second most common audit finding. During 2020, the Department of Labor’s Employee Benefits Security Administration issued guidance that was intended to relax this requirement for employers unable to satisfy the general rules, but it still requires those employers to act reasonably, prudently, and in the interest of employees to comply as soon as possible. If your plan experienced any such delinquent remittances during 2020, they should be discussed with the auditor to determine whether the situation qualifies under the relaxed provisions.
Employer matching contributions may have also been paused and restarted during the plan year which will require additional testing of the compensation earned during those periods.
The CARES Act allowed plans to make loans up to the lesser of $100,000 or the individual’s entire vested balance. In addition, the Act allowed qualified individuals to suspend all loan repayments until December 31, 2020. Proper administration of these new provisions will be additional steps in the audit testing, and the resumption of loan withholdings and repayments in January 2021 may lead to potential compliance issues for the 2021 year-end audit season.
The CARES Act allowed a qualified individual to treat up to $100,000 in distributions received from an eligible retirement plan during 2020 as a coronavirus-related distribution. The 10 percent penalty on distributions before age 59 ½ doesn’t apply and these distributions can be taxed ratably over three years. These distributions may also be repaid, which will be another administrative addition to the record keeping process. Also, required minimum distributions were waived for the 2020 plan year.
The CARES Act is a large piece of legislation that has impacted the majority of businesses. Communicating the adopted provisions and any unique payroll situations with your auditor in advance will help streamline the 2020 audit season.
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