Processing Distributions in 2020

[RatherBeGolfing]

4 minutes ago, Gilmore said:

Thank you Larry and Bird.

Bird, to your point regarding recordkeepers, do either of you have plans using John Hancock? 

The current John Hancock CRD form indicates on the form that it should only be used by active employees.  So I'm assuming, at least at the moment, that JH has determined that even if the plan amends for CRDs, 20% withholding should apply to a terminated QI.  I asked John Hancock about that and the rep said if the TPA or plan sponsor thinks the form should be used for other than inservice distributions they will process the form.  So it maybe sounds like they, like everyone else, rushed to put something out and maybe didn't think it through.

Question, would you use this form for a terminated QI if the plan is intending to adopt CRD provisions, and if so, do you see any issue on an audit (even a 5500 audit) due to the wording on the form?

Thanks once again.

I have spent way to much time on JHs CRD form and its issues. 

The dumbest part is that you only option is to specify dollar amount to withdraw from each source.  There is no way to say 100% of available funds from a source.  When the form first came out, you could elect 100% of deferrals, but had to specify exact dollar amount form other sources.  After we complained, they removed the 100% for deferrals rather than add 100% for other sources.  With the market going up and down, you have to guesstimate what the available balance will be for the next day in order to process.  If its partially vested source, you have to give yourself enough of a cushion, or JH will distribute non-vested funds.  When we brought it up again, JH recommended that we use 85-90% as the dollar value in order to make sure that there is enough assets to process the distribution.

Whoever designed and re-designed that form should be tarred and feathered.  

/ end rant.

[Luke Bailey]

On ‎4‎/‎18‎/‎2020 at 10:29 AM, RatherBeGolfing said:

Whether that will be possible in operation will depend on more than the trustee or plan admin though.  If the client is with a major platform recordkeeper like JH, American Funds, Ascensus, etc, the recordkeeper will make that decision.  

Agree that's the way will work in reality, but the law puts the responsibility on the "administrator," which recordkeeper is typically not and plan documents will say is "employer." So administrator is following advice/contractual requirement of recordkeeper in that case.

[Bird]

4 hours ago, Gilmore said:

Bird, to your point regarding recordkeepers, do either of you have plans using John Hancock? 

I do but only a couple and haven't looked at the form.

4 hours ago, Gilmore said:

Question, would you use this form for a terminated QI if the plan is intending to adopt CRD provisions, and if so, do you see any issue on an audit (even a 5500 audit) due to the wording on the form?

I (probably) would use it and don't see an issue

[Gilmore]

Thank you Bird.  JH told me today there is another version expected to come out that they think removes that wording.  I mentioned RBG's issue as well so hopefully they are fixing that too.

[Gilmore]

To follow-up, I just received an updated JH form that does include an option to elect a percentage and removes the inservice only wording.

[Albert F]

           I have no comment on what the record keepers are doing. I would take a slightly different approach to determining whether an eligible retirement plan administrator has an obligation to determine whether a non-periodic distribution is a coronavirus-related distribution not subject to the Code Section 3405 withholding tax requirements. I would note that if there is no such obligation, the participant could compel the administrator to transfer the funds in a tax-free fashion to an eligible retirement plan other than an IRA, whose plan administrator is willing to distribute the funds to the participant without any tax withholding. It is difficult to understand why a cash-flow relief provision would require the participant to engage in so much additional work to achieve the same result, i.e., being able to borrow up to $100,000 for up to three years in a tax-free fashion from an eligible retirement plan, as discussed below, particularly when many participants do not participate in a second plan to which they could transfer the planned distribution.   

           The general question is what obligation, if any, does the plan administrator have to determine whether a distribution will be a coronavirus-related distribution. As has been observed correctly, the IRS found not only that there was no obligation, but the plan may refuse to consider a certification by a qualified individual when it decided that a plan could decide whether to treat distributions as what Katrina Emergency Tax Relief Act of 2005 (“KETRA”) called Katrina distributions, and, if it do so, it may develop any reasonable procedures for determining whether a distribution is a Katrina distribution. [IRS Notice 2005-92, 2005-2 C.B. 1165, 1167 (describing this approach in Section 2.C).]  It seems more consistent with the KETRA statutory mandate, “qualified Hurricane Katrina distributions shall not be treated as eligible rollover distributions,” and the similar CARES Act mandate that the plan administrator is obligated to have and publicize a good faith and reasonable procedure for determining for tax withholding purposes whether an individual is a qualified individual.  One can argue this was not the case for purposes of the KETRA Code provisions, because of a fundamental difference between the KETRA and CARES Act definitions of qualified individuals. A KETRA plan administrator would almost always have the burden of relying upon a participant’s certification that the employee’s principal place of abode was in the Katrina disaster area and the employee suffered an economic loss from Katrina. [Katrina § 101(d)(1).]  In contrast, a CARES Act plan administrator often has no such burden.  The administrator needs no employee certification because the plan administrator is usually the employer who caused the requisite adverse financial consequences to the employee by furloughing or reducing the hours of the employee.  The plan administrator should have no difficulty informing the record keeper about such events. Thus, the CARES Act appears to require a plan administrator/plan sponsor to treat a participant or beneficiary as a qualified individual if it has such direct knowledge, and, if not, to make a good faith effort to explain the significance of such a certificate and request and review any such submitted certificate before making any plan distribution.  

It would appear that, regardless of the Code requirements, an ERISA plan administrator would have a fiduciary obligation to proceed in this manner under either KETRA or the CARES Act.  Thus, guidance is needed from the DOL and the IRS about such notice and determination obligations and the similar ones arising if the plan terms are changed to permit a broader set of distributions.

 

[Bird]

17 hours ago, Albert F said:

Thus, guidance is needed from the DOL and the IRS about such notice and determination obligations and the similar ones arising if the plan terms are changed to permit a broader set of distributions.

Well, it took you a lot of words to get there.  As I've noted before, relying on KETRA rules is not necessarily wise and in fact has caused more trouble than help.  I don't see what the big deal is - a plan permits CV distributions, then there is no WH; it doesn't, then there is.  As far as certification, administrators may rely on the participant's self-certification.  Period.