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CRD Coronavirus Related Distribution not adopted but paid a few


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I have a plan that did not want to allow CRDs.  A few were paid by the recordkeeper and the Plan Sponsor noticed and shut them off.  I assume that the recordkeeper contacted Plan Sponsors to tell them the "default" was to allow unless they communicated that they did not want to offer.  When they noticed that some were paid, they shut them off.  The recordkeeper tried to recoup the money recently but the employees either didn't respond or had been terminated and had received a full distribution.

How should they correct?  I suggested having the Plan Sponsor adopt the CARES amendment but to only allow until they were shut off.  Any other ideas?  If they don't adopt the CARES Act CRD  - then don't they have a operation error where they did not follow the plan document?

 

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I vote for your idea.

If one uses IRS-preapproved documents and falls into the IRS’s remedial-amendment regime, eventually some document states what the plan’s sponsor and administrator (typically, the employer) treated the plan as having provided.

And that document should follow what was assumed to have been provided.  So:

From {the date the implied assent became effective} to {the date the plan’s sponsor revoked the implied assent}, . . . .

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Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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10 minutes ago, BG5150 said:

Didn't the CRDs expire?  Why put an end date?

Agree with suggestion and yes, expired, but if they did not not allow after a certain date where legally they could, the plan amendment (or a resolution if generic pre-approved plan amendment) should reflect that or else they have an operational defect on the flip side. Especially if employee A tells employee B that she got a CRD so why didn't B and he says he asked an denied....bad, but then not having the documentation to support, worse.

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The originating post’s description of the facts is that the plan’s sponsor “did not want to allow CRDs”, and might have provided something until it revoked whatever implied assent might have been set up by not promptly reacting to its recordkeeper’s notice.  If the plan’s sponsor ended its plan’s provision for a coronavirus-related distribution before tax law’s allowance for such a provision expired, the eventual plan amendment might truthfully state what had been provided.

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Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Were you allowed, once allowed, to take away the CRDs before the statutory expiration?

Wouldn't that be anti cut-back?  Was it specifically allowed.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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I don’t know the answer to BG5150’s further question.

But even if a change might have been a cutback, that wouldn’t excuse having the plan’s governing document truthfully state what the plan provided.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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21 hours ago, BG5150 said:

Were you allowed, once allowed, to take away the CRDs before the statutory expiration?

Wouldn't that be anti cut-back?  Was it specifically allowed.

Wow, I used "allowed" a bunch right there...Better query:

Once CRDs were effective for a plan, was it permissible to remove them before their statutory expiration?

Wouldn't that be a cut-back in benefits?  Or were they specifically allowed to be put it and taken away at the sponsor's or administrator's discretion?

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QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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On 9/3/2021 at 1:41 PM, BG5150 said:

Once CRDs were effective for a plan, was it permissible to remove them before their statutory expiration?

Wouldn't that be a cut-back in benefits?  Or were they specifically allowed to be put it and taken away at the sponsor's or administrator's discretion?

I don't think there is specific guidance as this probably wasn't contemplated.  But I don't see anything preventing it.  

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Ed Snyder

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I believe the participant can get the tax benefit even if the employer did not choose to add CRD. This is from the IRS website:
Even if an employer does not treat a distribution as coronavirus-related, a qualified individual may treat a distribution that meets the requirements to be a coronavirus-related distribution as coronavirus-related on the individual's federal income tax return. See section 4.A of Notice 2005-92.

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On 9/3/2021 at 12:41 PM, BG5150 said:

Wow, I used "allowed" a bunch right there...Better query:

Once CRDs were effective for a plan, was it permissible to remove them before their statutory expiration?

Wouldn't that be a cut-back in benefits?  Or were they specifically allowed to be put it and taken away at the sponsor's or administrator's discretion?

I don't think it would be a cutback to remove. The amendment to remove would have to pass discrimination test, which presumably here would not be a problem.

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19 minutes ago, BG5150 said:

How would removing the CRD differ from removing any other in-service withdrawal?  What makes it different?

It had a built-in sunset and by implication that sunset could be accelerated 🤔.

(Just spitballing - good question; I think an argument could be made that once you made one the implication would be that they would continue until their statutory sunset.  I'm not sure how or if you even could add a regular hardship "window" for a month or two or whatever.)

This is what happens when recordkeepers overstep their bounds.

Ed Snyder

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54 minutes ago, Bird said:

This is what happens when recordkeepers overstep their bounds.

A situation like this might result if a service provider treats a sponsor/administrator’s non-response to a notice as a plan amendment or as a service instruction.

I’m wondering which source grants a service provider such a power or right.  Is it:

a power in an IRS-preapproved document to amend a user’s plan?

a right under a service agreement to treat the sponsor/administrator’s non-objection to a requested service instruction as the administrator’s instruction?

neither (a service provider just did it without authority)?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Thanks.

I’ve seen service providers use door #2: the service agreement states that the service provider may perform its services according to the default in a request for instructions (if the plan’s administrator did not respond timely with a different instruction).

Do others have different experiences?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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On 9/8/2021 at 7:44 AM, BG5150 said:

How would removing the CRD differ from removing any other in-service withdrawal?  What makes it different?

Section 2, C. of IRS Notice 2020-50 says, "An employer is permitted to choose whether, and to what extent, to treat distributions under its plans as coronavirus-related distributions...." (emphasis supplied). Also, you could view the employer's behavior in permitting CRD's when it did not intend to amend as an error that is correctable under the latest EPCRS (Rev. Proc. 2021-30) by amendment, as long as nondiscriminatory.

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To me, the term "and to what extent" means they can put a cap on those distributions, or choose which sources are allowed.

At any rate the window has now closed, so it's a moot point.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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4 hours ago, BG5150 said:

To me, the term "and to what extent" means they can put a cap on those distributions, or choose which sources are allowed.

BG5150, I will grant you that that may be what they person who wrote that was thinking, but the words are far more open-ended than that. I protest if to follow the law I have to read the IRS's mind. I hope they feel the same way.

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BG5150, thinking further about this, I think my real reason for thinking that the amendment would not be a cutback is that a plan's CRD amendment, which there is still plenty of time to adopt (end of 2022), is supposed to document what the plan actually did, e.g. if it limited the amount to $50k, that's what the amendment would say. But you would agree, I think, that had the employer intended at the outset to limit CRD's to, say, the first 6 months of 2020, and had communicated that policy to its employees, it could have done that, and when it got around to amending the plan, its amendment would contain the June 30, 2020 cutoff of availability. That's all they would be doing here. The lingering issue has to do with the fact that the policy was not formally communicated to employees, but hopefully the recordkeeper's implementation was consistent and nondiscriminatory.

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