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COVID-19 (Coronavirus) Response: 401(k) Questions, Part I

March 19, 2020
Employee Benefits Advisory

401k FormsThe workplace and other employment consequences of responding to COVID-19 (coronavirus) will raise questions about 401(k) plan administration. Here are some questions that are likely to come up soon.

Can participants modify or terminate their elective contributions?

Yes, by following the plan’s normal rules and procedures. If the normal rules and procedures are not flexible enough for the situation, they can be changed temporarily to provide more flexibility.

Does the coronavirus emergency qualify for a hardship withdrawal?

Perhaps, depending on the circumstance, but probably not yet. The IRS recently added federally-declared disasters to the list of safe harbor financial needs, and many plans have been amended to include this. The president’s declaration of a national emergency, however, is not the same as a declaration of a disaster. The president could make a further declaration. Or, as in the past, the IRS could create a temporary safe harbor for this specific situation. Even without these additional actions by the president or the IRS, the coronavirus could lead to one or more other safe harbor financial needs or, if the plan permits, other immediate and heavy financial needs. This would depend on the terms of the plan, and the facts and circumstances of the particular situation.

Can participants stop making 401(k) loan payments?

Yes, the plan can allow participants to suspend loan payments temporarily during temporary layoffs and other unpaid leaves of absence, but this will not extend the maximum allowable period for repaying the loan (which is usually five years). When the participant returns to work, the loan payments will resume and either (i) the missed payments will have to be caught up by making additional payments or (ii) the remaining payments will have to be recalculated to pay off the loan during the remaining repayment period.

Can the plan waive a limit on the number of 401(k) loans?

Yes, the plan can waive the limit on the number of loans, but the plan cannot increase or waive the maximum amount that may be borrowed. Many plans have a limit on the number of loans, such as a limit on the number of loans that can be requested during a period of time or a limit on the total number of loans that can be outstanding to a participant at any particular time. The plan may not want to increase these limits permanently, but the plan could increase them temporarily.

Is a plan amendment necessary for any of these actions?

Yes or no, depending on the situation. If the rules you want to change are specifically set forth in the terms of the plan, then the plan would have to be amended. On the other hand, if the rules you want to change were established as administrative policies, they could be changed by administrative action without a plan amendment.

For more information, please contact your primary Varnum attorney or any member of the Employee Benefits Practice Team

For answers to additional 401(k) questions, see COVID-19 (Coronavirus) Response: 401(k) Questions, Part II.

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