COVID Tax Relief when plan does not choose COVID Options

[Gilmore]

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.

 

[RatherBeGolfing]

3 hours ago, Gilmore said:

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?

This is no different than any other feature that a plan could offer but decides not to offer. 

Correction: Participant IS still eligible for tax relief

3 hours ago, Gilmore said:

A participant, age 60, has work hours reduced and would be a qualified individual.

The reduced hours are immaterial since the plan does not offer coronavirus-related distributions.

3 hours ago, Gilmore said:

I'm assuming the distribution would be processed as a distribution eligible for rollover with 20% withholding. 

Yep.

Correction: I guess not until you hit the $100,000

[Gilmore]

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.

[RatherBeGolfing]

2 hours ago, Gilmore said:

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.

Correct.  The 10% default withholding (rather than 20%) and early distribution penalty relief applies to CRDs only.  Other than that, its business as usual.

Correction: 10% default would apply for a qualified individual, even if the plan does not adopt CRDs as a distributable event.

[CuseFan]

I've been searching for a definitive answer to that for a couple of days and have not seen anyone (industry group and/or legal summaries) explicitly say that if a plan does not permit CRDs that they still w/h 20% even though a qualified participant can treat a 2020 distribution as a CRD. Maybe it's there between the lines - that a 2020 distribution can be both not a CRD as determined by the plan, in that it doesn't permit, and a CRD as determined the participant. Each treats distribution in that fashion. I can get there, was really hoping someone "official" would come out and clearly state it. 

Both a CRD and not a CRD at the same time? I am hereby renaming CRDs as Schrodinger's Distributions.

[CuseFan]

Could a plan that does not otherwise want to permit CRDs in terms of expanded distribution availability nonetheless allow for them on a limited basis (identical to existing distribution availability) such that the 20% w/h is waived? Plans can limit CRDs as desired (on a uniform and nondiscriminatory basis). I assume an amendment would be necessary to do so. Thoughts?

[Gilmore]

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.

[RatherBeGolfing]

2 hours ago, CuseFan said:

if a plan does not permit CRDs that they still w/h 20% even though a qualified participant can treat a 2020 distribution as a CRD

participant cannot treat a distribution as a CRD if the plan does not offer CRDs...

Correction: participant can treat a distribution as a CRD for tax purposes even if the plan does not offer CRDs...

2 hours ago, CuseFan said:

Maybe it's there between the lines - that a 2020 distribution can be both not a CRD as determined by the plan, in that it doesn't permit, and a CRD as determined the participant.

Both a CRD and not a CRD at the same time? I am hereby renaming CRDs as Schrodinger's Distributions.

 

No.  If the plan does not permit CRDs, the cat is officially dead.

Correction: The cat is jumping around in the CARES box...

[Gilmore]

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?

[RatherBeGolfing]

1 hour ago, Gilmore said:

but doesn't the EE still get to apply the tax relief such as ratable tax reporting, ability to pay back, etc?

No.  You can only treat it as a CRD if the CRD is offered by the plan.  Otherwise it is just a distribution.

Correction:  Yes...

[CuseFan]

Everything I have read says a "qualified person" can treat a distribution received in 2020 as a CRD. From NAPA Q&A, and read similar in other places as well. Plan treatment and Participant treatment are independent.

CD4: Are terminated participants eligible for a COVID-19 distribution?

A: Yes. The treatment to an individual participant is independent from the treatment by the plan. In other words, it doesn’t matter to the participant what the distributable event from the plan was. It may have been due to the plan permitting a COVID-19 distribution or due to another triggering event, such as termination of employment. If the participant is a qualified individual and receives a distribution in 2020, then the individual is entitled to treat the distribution as a COVID-19 distribution—there is no 10% additional tax; the amount can be included in income over three years; and there is a three-year repayment right.

[Gilmore]

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.

[CuseFan]

4 minutes ago, Gilmore said:

Q.  Is the 20% withholding waived only if the plan permits these distributions?

A. No

Yeah, that had me confused too. If a plan will not permit CRDs, then I don't see how it justifies not w/h 20%.

[RatherBeGolfing]

I think you guys have changed my mind on how it applies to the participant, in other words participant tax treatment is separate from plan treatment.

I'm still struggling with the withholding part though, since the plan is required to withhold. And if you don't adopt the optional CRD, I guess you would still have to amend if withholding changes applies regardless of CRDs...

[RatherBeGolfing]

Follow up from above...

So what if I took $120,000 distribution today, from a plan that elected to not adopt CRDs.  10% default on the first $100,000 and 20% on the last $20,000?

[Gilmore]

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

[Larry Starr]

1 hour ago, RatherBeGolfing said:

I think you guys have changed my mind on how it applies to the participant, in other words participant tax treatment is separate from plan treatment.

I'm still struggling with the withholding part though, since the plan is required to withhold. And if you don't adopt the optional CRD, I guess you would still have to amend if withholding changes applies regardless of CRDs...

I'm still figuring out how we will handle this.  I'm thinking that ANY plan level distribution (up to $100k) for any plan reason (termination, working past NRA, disability, etc) SHOULD be treated as a Coronavirus distribution.  I'm considering that we won't be adding CDs as an option (unless a client really wants it) but at some near point we change over so that all distributions would  be CD tax treatment (assuming participant does his certification). Still working this out in my head.  I think we would use our standard distribution forms, but have a special added colored sheet that goes on top describing what to ignore in the package (like the tax notice, the mandatory withholding) and has the necessary certification as an alternative.  Ultimately, the plan amendment would reflect this policy.  Comments?

Also, if anyone has any CD election forms from any of the platforms, it would be helpful if you could post it.

[RatherBeGolfing]

8 minutes ago, Larry Starr said:

I'm thinking that ANY plan level distribution (up to $100k) for any plan reason (termination, working past NRA, disability, etc) SHOULD be treated as a Coronavirus distribution.

But only if the participant is a qualified individual, right?  If I don't the definition of qualified individual, I don't get tax relief.   So you would still have to ask all the CD/CRD questions (regardless of plan adoption) just to figure out if 10% default or 20% required applies.  If you fail to withhold when you have to, that could be an issue too. 

[RatherBeGolfing]

JH CARES - withdrawal form.pdf

John Hancock CRD form

[Larry Starr]

14 minutes ago, RatherBeGolfing said:

But only if the participant is a qualified individual, right?  If I don't the definition of qualified individual, I don't get tax relief.   So you would still have to ask all the CD/CRD questions (regardless of plan adoption) just to figure out if 10% default or 20% required applies.  If you fail to withhold when you have to, that could be an issue too. 

Yes; I talked about the "necessary certification" later in that posting. 

[Larry Starr]

14 minutes ago, RatherBeGolfing said:

JH CARES - withdrawal form.pdf 375.92 kB · 2 downloads

John Hancock CRD form

Thank; that will be helpful.

[Peter Gulia]

For those plans served by a recordkeeper that uses Relius software, would it be simpler to ask FIS Relius what they think the rules are?

[Gilmore]

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.

[RatherBeGolfing]

30 minutes ago, Larry Starr said:

Yes; I talked about the "necessary certification" later in that posting. 

missed that part :)

 

[EBECatty]

I'm finding that Notice 2005-92 following KETRA addressed many of the open questions in the CARES Act. Even if it's not the same guidance eventually released on CARES Act, it's at least very instructive in how similar situations have been handled previously and probably can be safely handled pending official guidance.

To the extent the same rules govern 402(f) notices and direct rollovers, if you default to no 20% withholding for plans not offering CRDs, would you also default to no 402(f) notices and no direct rollovers?

This is from Sections 2.B and 2.C:

B. Direct rollover and 20% withholding requirements are not applicable to Katrina distributions.

If a distribution is treated as a Katrina distribution by an employer retirement plan, the rules for eligible rollover distributions under §§ 401(a)(31), 402(f), and 3405 of the Code are not applicable with respect to the distribution. Thus, the plan is not required to offer the qualified individual a direct rollover with respect to the distribution. In addition, the plan administrator does not have to provide a § 402(f) notice. Finally, the plan administrator or payor of the Katrina distributions is not required to withhold an amount equal to 20% of the distribution, as is usually required under § 3405(c)(1). However, a Katrina distribution is subject to the voluntary withholding requirements of § 3405(b) and § 35.3405-1T of the Temporary Employment Tax Regulations.

C. Treatment of distributions as Katrina distributions.

An employer is permitted to choose whether to treat distributions under its plans as Katrina distributions. Further, the employer (or plan administrator) is permitted to develop any reasonable procedures for identifying which distributions are treated as Katrina distributions under its retirement plans. However, if an employer retirement plan treats any distribution of an amount subject to § 401(k)(2)(B)(i), 403(b)(7)(A)(ii), 403(b)(11) or 457(d)(1)(A) as a Katrina distribution, the plan must be consistent in its treatment. Thus, the amount of the distribution must be taken into account in determining the $100,000 limit on Katrina distribution payments made under the retirement plans maintained by the employer.