COVID-19 Impact on Retirement Plans

Covid-19 Business Impact on Retirement Plans

Businesses that have survived the initial economic shockwave caused by the COVID-19 pandemic have a lot to be proud of.

However, with the unpredictability of the fall season looming, it’s important to understand how the decisions you make today will impact your business tomorrow.

We previously communicated to our clients and friends the provisions of The CARES Act which was passed back in March in response to the COVID-19 pandemic. The CARES Act allowed sponsors of retirement plans to amend their plans to permit coronavirus-related distributions (CRD) for participants directly impacted financially. This included plan withdrawals, changes in loan limits, waiver of RMD requirements, and elimination of the 10% excise tax for distributions made to participants prior to age 59 ½. Please remember that plan documents, company policies and handbooks may need to be revised if you adopted these changes.

At this time we want to highlight the provisions within the Internal Revenue Code relating to partial termination which can be triggered by COVID-19 related location closures or employee terminations. If you have, or plan to lay off employees, you need to be acutely aware of the qualified retirement plan partial termination rules. Before you make a major business decision that could have a ripple effect, our team at RBT suggests that you reach out to your team of financial experts to get advice.  Remember, it’s always better to be proactive than reactive.

A retirement plan can suffer a partial termination if a substantial portion (usually 20% or more) of plan participants are terminated, or if a defined benefit plan stops or reduces future benefit accruals. If a partial termination occurs, participants must be immediately 100% vested in all accrued benefits. This means that employer contributions, including matching contributions and profit sharing contributions must become fully vested regardless of the vesting schedule in the plan document.  There may be other ramifications for defined benefit plans and in particular if you participate in a multi-employer defined benefit plan.

The IRS has prescribed a “turnover rate” formula to determine whether the reduction is significant. When calculating turnover to determine if a partial plan termination has been triggered, make sure you are using the proper calculation because the IRS is referring to participant turnover, not employee turnover.

Here’s an example to determine if a partial plan termination has been triggered:

Plan A has 300 participants at the beginning of the plan year.  Due to layoffs, 80 participants are terminated from employment during the year.  An additional 20 employees become eligible to participate during the plan year.  The turnover rate is 80 ÷ 320 or 25%.

In contrast, if we were to calculate simple employee turnover, you would use this formula:

Turnover rate = # of separations ÷ average # of employees.

The number of participants in a retirement plan is not always the same as the number of employees, so the turnover rates will not necessarily be the same.

RBT recommends that you to contact your third party administrator for guidance.  If your plan is chosen for audit, and it is determined that you did not comply with the regulations, the plan may lose its qualified status  which could result in the loss of the tax deduction that was taken resulting in significant tax consequences, penalties, and fines.  RBT is here to assist our clients at all times, but in particular during uncertain times, in a thoughtful, professional, and prompt manner.

In a recent Frequently Asked Question (FAQ), the IRS clarified some information that can be challenging to understand.  For more information, see

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Why Ongoing Independent Budget Reviews Offer Big Benefits for Municipal and County Governments in New York

Budget Review

As towns, villages, cities, and counties in New York deal with the economic fallout of COVID-19 in their own finances and on those of their taxpayers, it is a good time to consider an independent budget review to ensure that elected officials are doing all they can do to manage governmental funds properly.

Counties generally have budget departments, and often use independent reviews as a matter of course. In smaller municipalities, a municipal accountant or budget officer will generally ask department heads to submit budget requests, and then review those requests with them. The budget officer and the municipality’s chief fiscal officer must work together to create a realistic budget for the municipality’s governing board. This is intensive work in good times, and the pandemic has tightened finances across the board, creating new stresses and concerns.

New York State has projected an overall decline in sale tax revenues of 15 percent for April 2020 through March 2021, according to the State Comptroller’s Office. Some local municipalities will be hit even harder, especially with falling revenue from gasoline taxes due to lower prices at the pump. The New York Association of Counties has estimated that New York’s counties will see 22 percent drop in sales tax collections for the full year, a shortfall of $1.09 billion.

The Government Finance Officers Association notes that, particularly in difficult financial times, bringing in someone with technical expertise to review the municipality’s finances can provide reassurance to taxpayers that officials are acting responsibly.

An outside accountant can analyze the municipality’s operating results year-to-date, provide a clear-eyed perspective, and mediate the sorts of disagreements that inevitably arise among officials during budget negotiations.

At the same time, the reviewer can report any, identified deficiencies and inaccuracies in the municipality’s processes noted during his or her analysis and suggest solutions.

The independent accountant can review the budgeting practices of each department, and the assumptions on which planning is based. From there, the accountant can look at their projections of estimated revenues and appropriations and determine if they are reasonable.

For instance, town highway superintendents, who draw up their own budgets that require town board approval, may have disagreements with the town supervisor, and a neutral arbiter can help resolve the tension between what is needed to maintain roads and what the town taxpayers will bear overall.

In examining the overall budget process, the reviewer can look at the capital plan, and what expenditures are planned for the coming year or so; and the reviewer can look at debt projections. He or she can assess the fund balance plan and provide advice to officials on what they should use from those reserves

During the budget review process, the independent reviewer will meet with the members of the governing body to present comments, recommendations and findings and answer the officials’ questions. At the end of the process, the municipality receives a formal report.

An independent budget review can provide local government officials with assurances that they have done everything properly and responsibly for the taxpayers. The independent review also provides value and confidence for taxpayers, as they know someone with expertise in government accounting has provided input, and that there is a reasonable basis upon which their property taxes are determined.

How Improvement Districts Help Drive Needed Revenue for Municipal and County Governments in New York

Woodbury Commons

Municipal governments in New York looking for ways to generate revenue can consider improvement districts, such as business improvement districts, to fund needed services in high-demand areas without imposing an undue burden on other taxpayers.

New York State enacted legislation allowing for the creation of business improvement districts (“BIDs”) in 1981. In general, improvement districts are created to provide services to a specified area, while having the property owners within that area who would benefit from those services pay for them.

BIDs are formed and governed by municipal officials and community members and funded through an added tax on commercial property owners within the borders. In exchange for those taxes, these BIDs offer services including street and sidewalk clean-up and maintenance, with the aid of volunteers; marketing of the district, and special events that draw in potential customers and contribute to the life of the district and surrounding community.

BIDs may also drive revitalization efforts with the municipality, bringing to fruition improvements to sidewalks, roadways, lighting, and other downtown design elements.

In practice, business improvement districts can be narrowly tailored for a specific service, or a broader entity that oversees security, sanitation, land- and streetscaping and marketing for business.

Examples of expansive business improvement districts are found in the City of Middletown, where the Downtown Middletown Business Improvement District encompasses the heart of the commercial district near City Hall; and in the Town of Poughkeepsie, where the Arlington Business Improvement District centers on Raymond Avenue and borders on Vassar College.

An example of a more focused BID is one created by the Town of Woodbury for the Woodbury Common Premium Outlets, the 250-plus-store shopping center that draws 13 million visitors annually from around the globe. The Woodbury BID was created specifically to fund police services required by the outlets.

The Town of Woodbury, with an estimated 2019 population of 11,370, employs 21 full-time and two part-time police officers, and four full-time civilian dispatchers.  Although the town has little other crime of any significance, according to statistics from the town and from the state Division of Criminal Justice Services, the department handles hundreds of larceny cases and more than 1,500 motor vehicle accidents annually.

Creating a business improvement district requires a public hearing. The district must be clearly defined, and its enhanced services will be funded via a special assessment on each property within its boundaries. Because the districts have higher demands for the services, the tax is essentially a premium

Although the BID will be incorporated as a non-profit, the assessment will be levied by the municipality along with property taxes, and the taxing district remains under the control of the local government. According to the Government Finance Officers Association, this has the added benefit of maintaining accountability to the public for the improvement district’s spending.

Some BIDs, including Middletown and Arlington were formed in part to revive urban downtowns that suffered in previous decades when malls and chain stores drew customers out of traditional shopping districts.

In areas where there may be separate special districts for water, sewer, lighting etc., a BID can also consolidate these other entities and simplify the structure of government. In cases of municipal mergers, BIDs can also play a role. For example, when towns and villages discuss mergers, concerns by village residents about reductions in services often present a stumbling block. In such a case, the solution could be a business improvement district that follows the village outline. That would allow a special assessment for dedicated police coverage for the former village, and the town could take over water and sewer as special districts.

Local governments need revenues to provide enhanced services to support the economic health and stability of commercial areas. Business improvement districts present a way to do that by charging a special assessment to the commercial properties that will directly benefit from those services, without unfairly burdening other taxpayers.

Municipalities Can Build Financial Resilience in the COVID-19 Era and Beyond

Financial Strategy

The COVID-19 pandemic and the accompanying shutdown have brought financial challenges to municipal governments throughout New York State.

Sales tax revenues declined steeply across the state in April and May compared to 2019, and state aid will be cut or delayed. Unemployment rates may affect residents’ ability to pay property taxes, creating further worries about revenue as we head toward the fall budget season.

There are strategies that county, city, town and village governments can undertake to mitigate the effects of the crisis: finding alternate ways to generate revenue and to cut costs to address short-term needs in the next 12 to 18 months; and making the budgeting process and financial practices more resilient to address long-term goals for the next three to five years.

The starting point can be a two-part analysis: First, a short-term analysis of cash flow to ensure the municipality can keep running in the next few months. Then a long-term forecast can determine if an economic upturn will resolve issues, or if there are deeper problems that need repair.

The COVID-19 pandemic has caused immediate fiscal pain around the state.

A survey by the Association of Towns of the State of New York (AOT) found that in the month of March, towns in New York lost roughly $215 million in revenue between drops in sales tax, mortgage recording taxes, license and permit fees and justice court fines. AOT noted in its survey findings that businesses in the state were operating as normal for the first half of March. Sales tax made up the largest portion of the loss, according AOT.

The New York State Comptroller’s Office has reported that April sales tax revenues in New York’s counties and cities dropped by 24.4 percent compared to April 2019. May’s sales tax collections fell 32.2 percent compared to May 2019.

State tax receipts for May fell by 19.7 percent compared to May 2019, a drop of $766.9 million, the Comptroller reported. Personal income tax withholding revenues dropped 9 percent in May compared to May 2019.

In bad times, the Government Finance Officers Association recommends taking a financial diagnostic review of operations and the budgeting process to provide officials of a financially distressed municipality with an in-depth look at their budgeting and fiscal practices. This helps to assess financial health and to identify areas for strategic cost savings and alternative sources of revenues.

In such a climate, it is crucial that local governments find a way to create what the GFOA calls “culture of frugality,” and find responsible, cost-effective solutions

Short-term measures, meant to affect 12 to 18 months out, are cost-cutting and alternate-revenue strategies, such as dipping into reserves to bridge a budget gap. With each measure, a government must consider whether the move will be a sound long-term strategy, or if a cut today could lead to increased costs down the line.

A number of school districts in the mid Hudson region used a variety of these tactics to get through the 2020-2021 school budget season, avoiding deeper cuts to teaching staff or academic programs by leaving jobs unfilled after employee retirements, and using fund balance to offset tax levy increases to spare taxpayers and keep the budget under the statutory tax cap.

Longer-term planning for recovery after crisis requires a data-based approach that addresses root causes of financial stress. This means requires studying the economic and social environment of a municipality, analyzing budgeting processes and reforms, and creating an operational plan.

Now is the time for government leaders to look for ways to mitigate the crisis, to build resilience through 2020 and beyond.

Over the next several articles, we will discuss these approaches in more depth, with recommendations for concrete steps that local governments can take.

Breaking Down SBA Question 49

Paycheck Protection Program Forgiveness

After hearing concerns from small business owners across the country about the restrictions of the PPP, lawmakers passed a bipartisan bill called the Paycheck Protection Program Flexibility Act of 2020 to make the PPP easier to use and get forgiven. Still, a lot of confusion remains surrounding the terms of PPP loans. We will focus on SBA question 49 of SBA’s FAQ list to get to the root of what to do:

Question: What is the maturity date of a PPP loan?

New PPP loans approved on or after June 5th automatically have a loan length of five years. The PPP loan program is widely recognized for its forgivable nature if used for payroll, rent and utilities. Still, for a significant portion of borrowers, not all of the loan will be forgiven. The unforgiven portion will be converted to an SBA loan at a rate of 1%.

If a PPP loan received an SBA loan number before June 5, 2020, the loan has a two-year maturity. Existing loans can have their length extended from two years to five years, if the borrower and lender mutually agree to it. But what exactly does that mean for business owners who fall in this category, and how does one go about extending their existing loan?

The answer as it turns out, is not quite as clear-cut as you would hope. Lenders nationwide from longtime trusted local credit unions, to big bank chains are currently waiting on government rulings to learn how to proceed. There have been talks of complete blanket loan forgiveness roll-outs for any business owner who received up to $150,000 in PPP loans, but no concrete decisions have been made just yet. Lenders, like the majority of financial heavyweights, are taking a wait-and-see approach for upcoming changes to PPP terms as well as the forgiveness applications that are starting to roll in.

Even before the Covid-19 crisis, small business owners have long known the challenge of getting access to cheap capital. Extending two-year loans to five-year loans could be a helpful business strategy for businesses facing continued COVID-19 induced problems as we approach the tail end of 2020 and head into 2021.

To illustrate the appeal of extending a PPP loan, consider the following scenario. A small business applied for and received a $200,000 PPP loan. By using the loan primarily for payroll, utilities and rent, the business owner was able to have 75% of the loan forgiven, leaving $50,000 to be paid back to the SBA.

At 1%, a two-year loan of $50,000 results in a monthly payment to the SBA of $2,105.  The same loan over a five-year period is $855 a month.

For many small businesses, $1,250 a month can make a big savings difference. This crisis has shed light on how many small businesses operate on a small margin, so choosing the longer loan period can create better options for a sustainable business structure.

As lenders wait for further clarification from the SBA, many recommend business owners to be in regular communication with their lenders for important policy changes or updates. Depending on the bank you are working with, the likely scenario is that once you give them a call, the representative will refer you to your bank’s Business Banking Team to review your unique circumstance with a Loan Specialist. If your PPP loan falls in the two-year loan length category, the team may help you to complete reauthorization forms so your lender can approve the loan extension. Currently, there truly is no one-size-fits-all answer that can cover businesses across industries, which is what makes this issue all the more complex.

While some questions remain unanswered, it is important to do everything in your power to protect your business against future vulnerabilities and to stay vigilant to the challenges that lie ahead. The entire professional staff at RBT remains committed to helping our clients navigate these challenging times. If you have any questions, or would just like to talk about the financial future of your business, we are here for you. Please do not hesitate to reach out and connect to one of our team members.