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Can CARES Act distributions exclude active employees?


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Can a plan sponsor adopt the special distribution under the CARES Act and offer the benefit only to terminated employees? The plan sponsor wants to avoid having a host of active employees taking advantage of the benefit. And what about employees terminated participants who have taken pre-59.5 distributions - are they going to avoid the 10% penalty if the plan sponsor does not amend the plan for CARES Act benefits?

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No, because that would be discriminatory.   Why would he want to prevent active EEs from taking advantage of it if they are qualified individuals? 

If the plan does not adopt the plan for CARES  then they will be subject to the 10% premature distribution penalty.

4 out of 3 people struggle with math

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44 minutes ago, ratherbereading said:

If the plan does not adopt the plan for CARES  then they will be subject to the 10% premature distribution penalty.

Definitely (IMO) not true.  That's an issue that will be handled on the individual's tax return; the plan does not determine taxation/penalty.  Whether the plan adopts CARES provisions or not affects 20% WH.

2 hours ago, AJC said:

The plan sponsor wants to avoid having a host of active employees taking advantage of the benefit.

Does(n't) the plan allow terminees to take their money, at least after the end of the year of termination?  If so I don't think any special action is needed; let them take it (but if CARES provisions are not active then distributions are subject to 20% WH).

Ed Snyder

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8 minutes ago, Bird said:

Definitely (IMO) not true.  That's an issue that will be handled on the individual's tax return; the plan does not determine taxation/penalty.  Whether the plan adopts CARES provisions or not affects 20% WH.

Does(n't) the plan allow terminees to take their money, at least after the end of the year of termination?  If so I don't think any special action is needed; let them take it (but if CARES provisions are not active then distributions are subject to 20% WH).

Yes, I see your point. I misspoke

4 out of 3 people struggle with math

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1 hour ago, ratherbereading said:

No, because that would be discriminatory.   Why would he want to prevent active EEs from taking advantage of it if they are qualified individuals? 

NO!!!!!!!!!!!!  A plan can be discriminatory in design and practice, as long as it is not discriminatory in favor of Highly Compensated Employees...

And we have plans that have otherwise restricted distributions based on a number of factors.

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CRDs are optional and an employer can place more restrictions than are legally required (e.g., limit eligibility, limit amount, etc.). If wanting to allow for just for terminated employees, OK. That gets them out of having to withhold 20%, but otherwise no difference as everything else is an individual tax issue if employee is a Qualified Individual.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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3 minutes ago, CuseFan said:

CRDs are optional and an employer can place more restrictions than are legally required (e.g., limit eligibility, limit amount, etc.). If wanting to allow for just for terminated employees, OK. That gets them out of having to withhold 20%, but otherwise no difference as everything else is an individual tax issue if employee is a Qualified Individual.

Agreed - but only gets them out of 20% withholding for the "first" $100k. Any distribution over that amount is a "regular" distribution" (nad causes us headaches - as we have to process two distributions to handle withholding).

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36 minutes ago, MoJo said:

NO!!!!!!!!!!!!  A plan can be discriminatory in design and practice, as long as it is not discriminatory in favor of Highly Compensated Employees...

And we have plans that have otherwise restricted distributions based on a number of factors.

That is not how our TPA is interpreting that...

4 out of 3 people struggle with math

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3 minutes ago, ratherbereading said:

That is not how our TPA is interpreting that...

Time to find another TPA.  Discrimination basics 101.  One can discriminate pretty much as much as they want, provided it isn't in favor of the HCEs....

 

They don't want to do it.

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Beyond the points mentioned above and others:

 

If a plan’s sponsor relies on an IRS-preapproved document, consider that a document’s sponsor might (later) write CARES Act provisions with fewer choices than this plan sponsor seeks to specify.

 

A user may not rely on the IRS opinion letter that accompanies a preapproved document unless the user makes no change beyond those the document or the IRS’s Revenue Procedure allows.

 

A plan’s sponsor might not know today what would be within or beyond some document not yet written.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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7 hours ago, AJC said:

Can a plan sponsor adopt the special distribution under the CARES Act and offer the benefit only to terminated employees? The plan sponsor wants to avoid having a host of active employees taking advantage of the benefit. And what about employees who have taken pre-59.5 distributions - are they going to avoid the 10% penalty if the plan sponsor does not amend the plan for CARES Act benefits?

Why on earth bother?  They can be paid out anyway and treat it on their own return as a CRD.  Just to avoid 20% withholding?  Then do a rollover and THEN take the money out of the IRA.  Their request makes no sense.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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21 hours ago, Larry Starr said:

Why on earth bother?  They can be paid out anyway and treat it on their own return as a CRD.  Just to avoid 20% withholding?  Then do a rollover and THEN take the money out of the IRA.  Their request makes no sense.

I guess you are saying that a terminated participant under age 59.5 could rollover from a QRP to an IRA, have it distributed, and treat the IRA distribution as a CRD. And because of that option, a plan sponsor should not think worry about helping recently terminated participants avoid the 10% penalty (plus the state penalty) on lump sum distributions. Is that right?

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3 hours ago, AJC said:

I guess you are saying that a terminated participant under age 59.5 could rollover from a QRP to an IRA, have it distributed, and treat the IRA distribution as a CRD. And because of that option, a plan sponsor should not think about helping recently terminated participants avoid the 10% penalty (plus the state penalty) on lump sum distributions. Is that right?

Let's break it down.  If the sponsor does not adopt CRD provisions, they can take a regular distribution.  It would be subject to the 20% WH but if they are a qualified individual it is not subject to the 10% penalty; that is an issue for the participant.  If the 20% WH is seen as a problem, then yes, they could take the extra step of rolling it to an IRA first and then taking it from the IRA with no WH.  It's not clear what you are asking but if you rephrase "...a plan sponsor should not think about helping..." to "...a plan sponsor should not worry about helping..." then it is pretty close. 

BUT it now appears that you are talking about recently term'd participants; that wasn't evident in the first post.  Are they eligible immediately for regular distributions?  If so, then I'd be inclined to not change anything.  If not, I might think about opening it up to CRDs, at least for the terms.

Ed Snyder

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21 hours ago, Larry Starr said:

Why on earth bother?  They can be paid out anyway and treat it on their own return as a CRD.  Just to avoid 20% withholding?  Then do a rollover and THEN take the money out of the IRA.  Their request makes no sense.

We've tried that logic until we were blue in the face - and faced significant client backlash....  Just sayin - as a service provider, we're bound by client demand - regardless of how unreasonable.

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58 minutes ago, Bird said:

 If the sponsor does not adopt CRD provisions, they can take a regular distribution.  It would be subject to the 20% WH but if they are a qualified individual it is not subject to the 10% penalty; that is an issue for the participant.  If the 20% WH is seen as a problem, then yes, they could take the extra step of rolling it to an IRA first and then taking it from the IRA with no WH.  It's not clear what you are asking but if you rephrase "...a plan sponsor should not think about helping..." to "...a plan sponsor should not worry about helping..." then it is pretty close. 

BUT it now appears that you are talking about recently term'd participants; that wasn't evident in the first post.  Are they eligible immediately for regular distributions?  If so, then I'd be inclined to not change anything.  If not, I might think about opening it up to CRDs, at least for the terms.

Yes - I used the wrong term "employees" instead of "terminated participants" in the original post, and I changed "think" to "worry" in my follow up post. You say the participant can claim CRD when they file their return without the sponsor changing anything. Is that because immediate distributions upon termination are already allowed under the plan? I suppose then, if the 1099-R is filed with Code 1 in Box 7, the participant will still be able to claim otherwise when they file their return.

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Q: Can a plan sponsor adopt the special distribution under the CARES Act and offer the benefit only to terminated employees?  A: Yes, HOWEVER, this would create an optional form of benefit that would need to be tested under BRF testing if there are any HCEs who get it.  

If the plan adopts CRDs then the participants who take the CRD will not be subject to 20% upfront withholding.

If the plan does NOT adopt CRDs then a terminated participant who takes a distribution will be subject to 20% upfront withholding.  However, if the participant meets the requirements to be eligible for a CRD, then they are exempt from the 10% early withdrawal penalty and can spread out the taxes for 3 years and they have 3 years to roll the money back into the plan or IRA.  This will be determined when the participant files his/her tax return.

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16 hours ago, AJC said:

I suppose then, if the 1099-R is filed with Code 1 in Box 7, the participant will still be able to claim otherwise when they file their return.

That is how I see it and I think how most folks are seeing it.

Ed Snyder

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On 4/30/2020 at 3:12 PM, MoJo said:

We've tried that logic until we were blue in the face - and faced significant client backlash....  Just sayin - as a service provider, we're bound by client demand - regardless of how unreasonable.

I'm sorry you have that issue; I understand it. We have much more "authority" with our clients (because they give it to us, not because we demand it).  We are willing to sign off a client if what they "demand" is not what we believe STRONGLY is appropriate, but that is a rare circumstance.  Here is a restatement of what I said above, but how I would tell the client:

"I understand what you want; here's how we'll do it: You can just pay it out as normal (no change needs to be made to the plan) but the ex-employee (under the new law) can treat it on their own return as a CRD anyway.  If the payee wants to avoid the 20% withholding, they can do a direct rollover to an IRA and then take it out the next day.  No problem, and that gets you exactly what you want with no extra complexity on your part."  

Look, it's clearly part of being a good idea salesman; I've been a sales trainer for 100 years (even had formal courses in that in the '70's and early '80s) and I don't think I have one client who would push back and tell me they want to do it a different way after hearing this.  FWIW.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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3 minutes ago, Larry Starr said:

"I understand what you want; here's how we'll do it: You can just pay it out as normal (no change needs to be made to the plan) but the ex-employee (under the new law) can treat it on their own return as a CRD anyway.  If the payee wants to avoid the 20% withholding, they can do a direct rollover to an IRA and then take it out the next day.  No problem, and that gets you exactly what you want with no extra complexity on your part."  

This is EXACTLY the approach my team determined was the best course of action (a team of 10, seven of whom are ERISA attorneys and the other three being the bright ones, whose sole purpose is to function as subject matter experts to the business, our clients and their advisors).  Unfortunately others (notably sales) always come to the table with "everyone of our competitors can do this, why can't we" and undermine the authority my team usually has.  Despite the fact that we can show that not all (or even many) of our competitors are doing it, sales drives "product" and the mere hint of "product" causes RMs to promote it - even if it doesn't exist.

Just griping - but I've been doing this for 35 years, and for larger organizations, control gets diffused. I'll put my team (part of the line of business - not part of "legal") against any other service provider, and most ERISA law firms any day of the week.  Cooperation is still essential, and with too many voices in the client's ear, controlling the message is nearly impossible.  If my team gets in front of the client, it's done.  If not, its pandemonium.

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3 minutes ago, MoJo said:

This is EXACTLY the approach my team determined was the best course of action (a team of 10, seven of whom are ERISA attorneys and the other three being the bright ones, whose sole purpose is to function as subject matter experts to the business, our clients and their advisors).  Unfortunately others (notably sales) always come to the table with "everyone of our competitors can do this, why can't we" and undermine the authority my team usually has.  Despite the fact that we can show that not all (or even many) of our competitors are doing it, sales drives "product" and the mere hint of "product" causes RMs to promote it - even if it doesn't exist.

Just griping - but I've been doing this for 35 years, and for larger organizations, control gets diffused. I'll put my team (part of the line of business - not part of "legal") against any other service provider, and most ERISA law firms any day of the week.  Cooperation is still essential, and with too many voices in the client's ear, controlling the message is nearly impossible.  If my team gets in front of the client, it's done.  If not, its pandemonium.

Sorry to hear that; I left big company in 1983 because, even though I was the top technical wiz, there were Peter Principal folks above me who didn't have a clue.  So, we went out on our own when THEY went out of business!  *I* am the sales AND the technical, so I rarely have a conflict with myself (it does happen; just not very often!). And with a client who asks for this, it is never an issue of "others can do it, why can't we" it's "here's how to accomplish what you want in a way that makes sense".

Almost all business owners prefer that way, which is why we deal with business owners and not HR departments. It's also why we never answer a question when a client asks a question.  Instead we ask "why do you want to do that" and you would be surprised what stupid answers we get that we can then show the client the better way to accomplish their objective.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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2 minutes ago, Larry Starr said:

Sorry to hear that; I left big company in 1983 because, even though I was the top technical wiz, there were Peter Principal folks above me who didn't have a clue.  So, we went out on our own when THEY went out of business!  *I* am the sales AND the technical, so I rarely have a conflict with myself (it does happen; just not very often!). And with a client who asks for this, it is never an issue of "others can do it, why can't we" it's "here's how to accomplish what you want in a way that makes sense".

Almost all business owners prefer that way, which is why we deal with business owners and not HR departments. It's also why we never answer a question when a client asks a question.  Instead we ask "why do you want to do that" and you would be surprised what stupid answers we get that we can then show the client the better way to accomplish their objective.

Larry, we are cut from the same cloth.  My standard response is the same as yours (why do you want to do that?).  What my team does is work to fashion what the client "needs," rather than simply provide them what they "want."  Others think the easier solution is to cave to client wants - and then it doesn't produce what the client expected (because it wasn't what they needed), my team has to swoop in and fix it (but by that time the relationship has suffered).  My team often jokes about setting up our own shop.  It's only a joke as we all like the paycheck, like the company, and love the work - despite some challenges, and most of the people we deal with (including senior management) have come to trust and rely on us.

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16 minutes ago, MoJo said:

Larry, we are cut from the same cloth.  My standard response is the same as yours (why do you want to do that?).  What my team does is work to fashion what the client "needs," rather than simply provide them what they "want."  Others think the easier solution is to cave to client wants - and then it doesn't produce what the client expected (because it wasn't what they needed), my team has to swoop in and fix it (but by that time the relationship has suffered).  My team often jokes about setting up our own shop.  It's only a joke as we all like the paycheck, like the company, and love the work - despite some challenges, and most of the people we deal with (including senior management) have come to trust and rely on us.

Bless you my son!

But, "it's good to be the king" (LS for MB).

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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