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.

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.

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.

Thanks again everyone.

Circling back to my original question, many of our plans are not afforded a choice of differentiating the new distributable event from the tax treatment of a CRD. The decision is being made by the recordkeeper's forms and procedures. Either you opt-in and permit CRDs or you don't get to use a CRD distribution form and normal 20% withholding applies. My two concerns for asking the question were, is this what the law intended, or was the intent to allow ANY distribution to a QI to be afforded the ability to waive withholding, and if so, does the penalty for not treating the distribution to the QI as a CRD for tax purposes have the potential to result in a $100 penalty to the plan sponsor?

Well put Peter. I was thinking until further guidance I'll just go with the herd, but your response was much better.

I am apparently incorrectly disassociating the two aspect of a CRD. One creates a special inservice type of distribution for participants who are QI and would not otherwise have a distribution option under the plan. The other is the tax treatment that is afforded to ANY distribution made in 2020, even those made prior to the Act's enactment which I understand cannot be undone from a withholding standpoint, but I assumed (incorrectly it seems) would apply to any distribution thereafter for a QI including the ability to waive withholding. It's definitely easier for us to follow along with the 20% withholding, so I appreciate that I am not correct. Thanks for the responses.

Appreciate all of the responses. Just a bit more clarification, then I will relent, and I do appreciate everyone's insight. If I am a QI and I request a distribution from a plan in which I have a distributable event without the plan needing to be amended for CRDs (like a termination distribution), and I want to waive the 10% withholding that the CARES Act says would apply, and I'm told that I'm subject to 20% mandatory withholding because the plan sponsor didn't "opt-in" to whatever process the recordkeeper put in place, and the $1000 that I thought I was distributing to pay my rent is now only $800, and I complain to the IRS, DOL, and anyone else who will listen, is there a chance that the plan sponsor would be dinged $100 for not allowing me to wave the withholding? Separate issue, with John Hancock for example. If I have a client using John Hancock and they do intend to amend their plan to allow CRDs, and I have a terminated QI requesting a distribution, are other TPAs using the John Hancock form for CRDs even though it specifically says it's only for "Active Employees" and intended to be used as an inservice distribution? Sorry to beat this to death but we're trying to strike the right balance between the spirit of the Act for the participants, and providing the right guidance to the client. Thanks!

Sorry I forgot to get back to this. The answer that I received regarding the EOB is that the author is less inclined to support eliminating the safe harbor for HCEs mid year and still retain safe harbor status for safe harbor match plans. He did actually mention your argument Luke, but said the IRS may not see it that way and would err on the side of caution and do the ADP/ACP test.

Thanks Bill. II get what your saying. If the plan didn't allow for any other distributable event, then the participant can't make the plan amend to allow a CRD, which would be a new type of distributable event. But if the participant has a distributable event under current provisions, the distribution should be treated as a CRD for tax purposes if they are a qualified individual. The issue we are running into is that many of the recordkeepers forms are only available if the plan sponsor "opts in" and most of the forms have some sort of certification that the plan will be amended or are permitting any kind of CRD. Taking it a step further, for some recordkeepers, once the sponsor "opts in" they are processing CRDs for any participant that self certifies, even if the plan sponsor did not intend to allow an "inservice CRD". So either every qualified individual gets the special tax treatment, even if the plan was not intended to allow for a new distribution option, or no qualified individual gets special tax treatment. And in this context I'm only concerned about how the withholding is done. I know the QI has all the other tax benefits when they do their taxes.

I guess I'm asking a question of other TPAs that primarily partner with recordkeepers. And maybe I'm being overly paranoid, which is very likely. It seems that the majority of the recordkeepers we work with have special forms for processing CRDs and CRLs, and if the plan sponsor does not "opt in" to using these forms they will process distributions in the "normal" manner regardless of the participant's status as a qualified individual. We have some clients that feel their plans offer sufficient distribution options already and do not want a new special inservice distribution option, so they don't want to "opt-in". Now a participant who terminated 5 years ago wants to take a distribution as a qualified individual under the CARES Act because they were laid off from their current employer. Being savvy enough to know that they should be permitted to waive out of the withholding are told by the recordkeeper that because the plan sponsor did not opt in to allow CRDs, they will be subject to 20% mandatory withholding. At this point it should not be the plan sponsors decision, should it? I understand that the Plan would need to be amended to permit a qualified individual who would not otherwise have a distributable event under the current plan provisions to take a distribution if say for example they are still employed with reduced hours and are 30 years old. But does the Plan have to be amended to permit a qualified individual who has a distributable event to be able to waive out of the withholding? Isn't that expressly permitted in the Act? Are other TPAs telling their clients just to opt in so that qualified individuals are treated correctly under the Act? Could a qualified individual who does not have their withholding applied correctly make an issue for the plan and require a penalty to be paid for not being able to waive out of the withholding? Thanks.

Thanks. So let's change the example and say the $100,000 is being used to purchase the primary residence. A qualified individual can request a loan up to $100,000. I don't believe the ACT mentions any restrictions on the use of the funds. So if the participant is purchasing a primary residence, and the plan allows for a residential loan to be repaid over 15 years, is it acceptable for the $100,000 loan to be repaid over 15 years if the funds are being used to purchase the primary residence. Thanks again.

Is the ability to pay out RMDs a plan decision, but the taxation not? For example, the plan sponsor decides that RMDs will be paid out as usual, but the distribution itself is not taxed in the same manner as an RMD (for example 20% withholding would apply, eligible for rollover, etc).

Unlike a CRD which is an entirely new type of distributable event, it is my understanding that the CARES Act loan provisions must work in concert with existing loan procedures. If accurate, and if the plan allows for residential loans to be paid back over a 15 year term, can a qualified individual who is in the middle of building a new home request a $100,000 loan with a 15 year term, assuming all $100,000 is being used to pay construction costs and assuming the plan is amended to allow the increased CARES Act loan limits? The only mention that I think I see in the Act regarding 5 years is with respect to delaying payments, not with the actual term of the loan. It seems this would be possible, but once again, I'm looking at a recordkeeper's new CRL form that specifically says the loan can only be for 5 years, so maybe I'm wrong. Thanks for any clarification.

Thanks for sharing the JH CRD form, which is one of the reasons for the original post. The Trustee/Authorized signer, is signing the form indicating that they "...have caused or will cause (prior to the applicable deadline) the Plan to be amended to permit CRDs...", Section Eight of the form. I'm reading that to mean that if the Plan was not intending to amend to adopt CRDs, they don't get to use the CRD form, and JH would process as a "normal" distribution with 20% withholding for example. First of all, I don't know how John Hancock can even ask for that assertion. I don't know about Relius, I'm concerned about the many recordkeeper platform partners that we work with that are preparing similar forms and procedures.

RBG, that's sound right in theory, but I don't think the recordkeepers are designing there systems in that manner.

Ok, again not trying to argue, just trying to get this right. Derrin Watson published a Q&A from a recent ERISApedia webinar. Couple of examples from the Q&A... Q. Is the 20% withholding waived only if the plan permits these distributions? A. No Q. So every distribution during 2020 can essentially not have 20% tax withholding if participants certify they are qualified? A. Pretty much. Q. If it is not a specific COVID-19 distribution, how would you know to do the voluntary 10% rather than the mandatory 20% withholding? A. If the participant has certified the participant is a qualified individual, and the amount does not exceed $100,000, use the voluntary withholding. All of that seems to indicate that the participant can still treat the distribution as a CRD for their tax purposes regardless of how the distribution was treated by the Plan. It also seems to make sense since distributions processed prior to the ACT and on or after January 1, 2020 can be considered to be CRD distributions even though no one even heard of a CRD distribution at that point in time. The last Q&A above was the one that I find most problematic to administer if the recordkeeper is not on board and limiting use of their CRD forms.

RBG, not to argue, but what about a distribution that was made prior to the Act? A CRD is permitted starting January 1, 2020? Those distributions would have been treated as non-CRD at that time. I'm with you that the recordkeeper may treat the distribution as non-CRD if the plan does not opt for the provisions, but doesn't the EE still get to apply the tax relief such as ratable tax reporting, ability to pay back, etc?

I was very excited about RBG's black and white answer and Cuse throws more gray at it. I do recall hearing in one of the many webinars over the past week and half that some of this will depend on the recordkeeper's setup.

Thanks RBG. So your thinking is that if the plan does not offer the new CRD type of distribution, another type of distribution that is available under the plan, and made to a "qualified individual" who should be able to consider the distribution as coronavirus-related distribution for tax purposes, would still need to pay the 20% withholding? So he's out the 20% initially, and then settles everything up when he does his taxes? I wasn't seeing that way, but if you are correct that saves us a lot of extra work.

Now that most of the recordkeepers we work with have put together their strategy for handling CARES Act provisions, I'm wondering how other TPAs are handling situations in which the plan does not want to adopt the CARES Act provisions, but a participant would otherwise qualify for the tax relief on a distribution that is permitted under the plan? And hopefully I'm just not thinking this through properly and it is not even a problem. But I just heard from one of our recordkeeper partners that if the plan does not complete their "opt-in" form, we are not able to use their CRD distribution form. So let's say the plan allows for inservice distributions at age 59.5. A participant, age 60, has work hours reduced and would be a qualified individual. The participant requests an inservice distribution under the current plan terms. If we can't use the recordkeeper's new CRD form, I'm assuming the distribution would be processed as a distribution eligible for rollover with 20% withholding. Also, for some of our clients we prepare the distribution package that includes the recordkeeper's election form. If other TPAs are doing the same, are you now putting both a regular election form and a CRD form in the package with instructions for completing the proper form based on qualified status? Or are you trying to determine the status before sending the forms? Thanks very much.

Thank you Mike.

Sounds good to me Mike. Thank you for responding.

Do you think it was intentional or an oversight that the criteria for a qualified individual includes reduced work hours, but not reduced compensation? If a salaried employee is required to work the same number of hours at a reduced salary are they out of luck to be considered a qualified individual? Thanks.

I'm just reading through a Q&A from a recent web seminar on the topic in which the presenter has indicated a concern with business owners using CVD loan money to put back into the business as a possible prohibited transaction? Any thoughts on that one.? I'm sure RATHER, that your guy isn't the only one doing this.