CARES Act

Does section 2202 of the CARES Act introduce a brand new in-service distribution category for 2020 coronavirus-related distributions by "qualifying individuals"?  Or does it still require employees to satisfy the existing IRS hardship safe harbors and then provide tax relief to hardship withdrawals that qualify as coronavirus-related distributions?

2 hours ago, Ian said:

Does section 2202 of the CARES Act introduce a brand new in-service distribution category for 2020 coronavirus-related distributions by "qualifying individuals"?  Or does it still require employees to satisfy the existing IRS hardship safe harbors and then provide tax relief to hardship withdrawals that qualify as coronavirus-related distributions?

You do not have to satisfy other hardship requirements, just what is in the Act.

I'm not so sure.  I just read the pertientn language in the act.  All I can see is that "a distribution" that is coronavirus related is not subject to the penalty.  I do NOT see anywhere that a new distributable event was added???  Can this be an oversight uncovered by an international man of mystery???

Please tell me I am missing something because this seems to be a huge gaping hole.

11 (B) CORONAVIRUS-RELATED DISTRIBUTIONS TREATED AS MEETING PLAN DISTRIBUTION REQUIREMENTS.—For purposes of the Internal Revenue Code of 1986, a coronavirus-related distribution shall be treated as meeting the requirements of sections 401(k)(2)(B)(i), 403(b)(7)(A)(i), 403(b)(11), and 457(d)(1)(A)of such Code and section 8433(h)(1) of title 5,
United States Code.

401(k)(2)(B)(i) is all the normal 401k distribution restrictions (hardship, 59 1/2).  I believe QNECs/QMACs/Safe Harbors are all referenced to that same code for their distribution restrictions.  But what about the profit sharing and match requirements on 5 years participation?

Also, are we in agreement that these distributions can be restricted just to active employees?  Terms can roll to IRA's first and take advantage of all of the repayment options. 

ahh maybe it's ok because it is a "stated event."  Similar to why match and profit sharing are ok to be withdrawn for hardship.

I think you sort have to follow the breadcrumbs in 2202.  ... 2202(a)(6)(B) ...a coronavirus-related distribution shall be treated as meeting the requirements of sections 401(k)(2)(B)(i)...   401(k)(2)(B)(i) includes distributable events like termination, death, and disability.  401(k)(2)(B)(i)(IV) references 401(k)(14), which lists amounts that may be withdrawn for hardship distributions.  401(k)(14)(A)(ii) lists qualified nonelective contributions (as defined in subsection (m)(4)(C)).   

(m)(4)(C)) Qualified nonelective contributions The term “qualified nonelective contribution” means any employer contribution (other than a matching contribution) with respect to which— (i) the employee may not elect to have the contribution paid to the employee in cash instead of being contributed to the plan, and (ii) the requirements of subparagraphs (B) and (C) of subsection (k)(2) are met.

I think the above gets us our distributable event and profit sharing.  Does that make sense?

From there we use 2202(a) to determine if we have a qualified individual and a coronavirus-related distribution.

1 hour ago, RatherBeGolfing said:

I think you sort have to follow the breadcrumbs in 2202.  ... 2202(a)(6)(B) ...a coronavirus-related distribution shall be treated as meeting the requirements of sections 401(k)(2)(B)(i)...   401(k)(2)(B)(i) includes distributable events like termination, death, and disability.  401(k)(2)(B)(i)(IV) references 401(k)(14), which lists amounts that may be withdrawn for hardship distributions.  401(k)(14)(A)(ii) lists qualified nonelective contributions (as defined in subsection (m)(4)(C)).   

(m)(4)(C)) Qualified nonelective contributions The term “qualified nonelective contribution” means any employer contribution (other than a matching contribution) with respect to which— (i) the employee may not elect to have the contribution paid to the employee in cash instead of being contributed to the plan, and (ii) the requirements of subparagraphs (B) and (C) of subsection (k)(2) are met.

I think the above gets us our distributable event and profit sharing.  Does that make sense?

From there we use 2202(a) to determine if we have a qualified individual and a coronavirus-related distribution.

 

You got it!

15 hours ago, austin3515 said:

Also, are we in agreement that these distributions can be restricted just to active employees?

I don't think so.  2202(a)(4)(ii)(III) includes an individual who experiences adverse financial consequences as a result of being laid off.  To me, the inclusion of "laid off" means that terminated employees are included, at least if the lay off was due to COVID-19. 

I don't know.  I don;t have to include these features at all.  Wouldn't the availability just be subject to BRF?  The terminated participant can roll their money to an IRA and take a tax favored distribution from their IRA.

I agree that you don't have to include them at all, but Im not sure you can exclude the laid off employees if you do.  

Do you mind if we tie in loans with this last part of the discussion?

Most, if not all, of our plans require that the participant be an active employee to request a loan.   I'm assuming section 2202(b)(2) permits the plan to allow a participant who is terminated (laid-off) related to the virus to request a loan with delayed payments?

12 minutes ago, RatherBeGolfing said:

I agree that you don't have to include them at all, but Im not sure you can exclude the laid off employees if you do.

I hate them for never answering the obvious questions when they write these damn things. 

They cannot take the loan unless it is for coronavirus related hardship. If an employee was terminated before the date of the enactment of the CARES Act, they would not qualify for the distribution unless they are experiencing financial hardship as a result of the virus. So, if they were laid off before 3/27/2020 because of the virus, they could apply for the loan. For employees terminated before the virus crisis, they would not qualify for the loan. 

All "rules" of distributions and loans are not applicable to this distribution, per the CARES Act. "(B) TREATMENT OF PLAN DISTRIBUTIONS.—If a distribution to an individual would (without regard to subparagraph (A)) be a coronavirus-related distribution, a plan shall not be treated as violating any requirement of the Internal Revenue Code of 1986 merely because the plan treats such distribution as a coronavirus-related distribution, unless the aggregate amount of such distributions from all plans maintained by the employer (and any member of any controlled group which includes the employer) to such individual exceeds $100,000."

33 minutes ago, RPAS said:

They cannot take the loan unless it is for coronavirus related hardship.

AGREED

For employees terminated before the virus crisis, they would not qualify for the loan. 

VEHEMENTLY DISAGREE.

Is there anything that substantiates the position that the hardship is limited to circumstances involving the plan sponsor?  I certainly haven't seen anything.

2 hours ago, Mike Preston said:

Is there anything that substantiates the position that the hardship is limited to circumstances involving the plan sponsor?  I certainly haven't seen anything.

Nothing in 2202(a)(4)(A)(ii) limits it to the plan sponsor.  You could have an account balance in a plan from a former employer and still meet the requirements for qualified individual. 

2202(a) limits coronavirus-related distributions to any distribution from an eligible retirement plan made on or after January 1, 2020, and before December 31, 2020 to an individual that satisfies the conditions of 2202(a)(4)(A)(ii).

2202(b) limits coronavirus-related loans to any loan to a qualified individual made during the 180- day period beginning on the date of the enactment. 

(b) only requires that the loan be made after the enactment

The employee certification only references the administrator of an eligible retirement plan and an employee. 

Can an administrator choose to deny the loan increase and withdrawal availability?  Seems to me it would be a poor choice and requiring proof with HIPPA laws and GDPR would any plans not allow withdrawals?  I have a $300k balance and am 38 so hoping to understand what my employer administratered plan will do As they’ve not figured it out yet. 

Both are optional provisions. That is, the employer may choose not to allow either.The law is ahead of you as far as privacy is concerned because the participant only needs to say that they are qualified to receive either the increased loan or distribution and the employer / plan sponsor can take the employees word.

7 hours ago, Mike Preston said:

Both are optional provisions. That is, the employer may choose not to allow either.The law is ahead of you as far as privacy is concerned because the participant only needs to say that they are qualified to receive either the increased loan or distribution and the employer / plan sponsor can take the employees word.

I have a question about this.  Lets say there is a small business completely unaffected by the virus so far.  Participant is not married, no kids.  The small business owner knows there is nothing.  Are they at risk for signing off on it?  Basically they KNOW the person is lying.  Note that if they have no knowledge to contrary, I have no concerns about approval.

[edited because there was a ridiculous number of typos because I guess I was rushing the first time...]

No. The employer can't know, period.

You're saying based on the statute the employer cannot know.  But my question is what if in reality they do know.  I think its at least an interesting quesiton. How far does this go?  Does it go all the way, as you (Mike Preston) suggest?  Or are there limits?  For example, what if the Plan Administrator is knowingly signing off on the claim of his child (i.e., if his or son works at the business)?  Would that be over the line?  I just assume something most be over the line.

I'll add to that I don;t think this question will be that uncommon from plan sponsors.  They don;t like signing off on things that they know have issues.  Remember the basis for my question is that the plan administrator DOES KNOW.  So don't respond with "Well how could they really know."

2202(a)(4)(B) (B) EMPLOYEE CERTIFICATION.—The administrator of an eligible retirement plan may rely on an employee’s certification that the employee satisfies the conditions of subparagraph (A)(ii) in determining whether any distribution is a coronavirus-related distribution.

"may rely on" indicates that the administrator is not required to verify that employee's claims are true.  It does not prevent the administrator from requesting something to verify the claim.  If the administrator knows that the claims are false, I think you have to deny the claim.  You cant rely on someones statement if you know it is false.  That said, I tend to agree with Mike that an employer cant know everything about its employees, even the ones they are very close to.  

80% of people will supposedly have it. It’s not your place to know and all of our businesses are adversely affected. 

In general us it safe to say plan administrators wishes would be to keep the money and not to disperse it?

Curious what an employer’s own motivations might be?  Maybe they don’t want to alter plan documents?

All businesses affected, yes, but definitely not all individuals.  Actually no there are some businesses that will benefit from this type of crisis.  Take Zoom for example, and conference calling services.  Those will be through the roof with new business.

I'm not disagreeing with anything you all are saying.  The statute is plain enough.  But it wouldn't be the first time the IRS had an interpretation of a statute that we all looked at each oter and said "what the what?".

i'd like to hear from them on this for sure. 

3 minutes ago, JRSP533 said:

Curious what an employer’s own motivations might be?  Maybe they don’t want to alter plan documents?

There is a certain hassle factor and cost to all of this.  In my world, "a small business completely unaffected by the virus so far" would not be adding any coranavirus provisions and thus wouldn't have to consider this Q.

Hey Bird - that was my initial thought as well, but while the employer could be completely unaffected, a participant might easily have a spouse, for example, who has been laid off, whatever. So I've readjusted my thinking a bit.

To help consider together Bird’s and Belgarath’s recent points:

Some plan sponsors already have decided not to decide whether the plan provides a coronavirus distribution or coronavirus loan until the plan’s administrator receives the first claim requesting one.  Then, the plan’s administrator will ask the plan’s sponsor whether the plan includes or omits the provision.

Do BenefitsLink mavens think such a wait-and-see is a good idea?  Or a bad idea?

I haven't formulated an opinion on that one yet. But the reality is that many of the recordkeeping platforms are going to force a decision one way or the other. Their mode of operation seems to be that, "We're going to allow this UNLESS you affirmatively elect otherwise."

38 minutes ago, JRSP533 said:

80% of people will supposedly have it. 

Thats not the point though. The Cares Act requires that you or your spouse is diagnosed with SARS– CoV–2 or COVID-19, oror that you experience adverse financial consequences due to being unable to work or having reduced hours at work.

44 minutes ago, JRSP533 said:

all of our businesses are adversely affected

That is debatable, but really not the point.  The individual has to experience adverse financial consequences caused by the virus.  The list includes being quarantined, laid off, furloughed, reduced hours, unable top work due to lack of child care, or closing or reducing hours of a business owned or operated by the individual.  Many will fit into this category, but not all.

49 minutes ago, JRSP533 said:

It’s not your place to know

As the employer, you are correct.  As the plan administrator, you are incorrect.

50 minutes ago, JRSP533 said:

In general us it safe to say plan administrators wishes would be to keep the money and not to disperse it?

Not really.  but they don't want to be part of something fraudulent, or see the all the contributions it has made for its employees get erased without good reason.

all Individuals, spouses, childcare. There are too many variables affecting economic conditions of your participants. 
 

1. can you require a spouses medical records showing diagnosis?  (HIPPA)  

Curious how you could claim your participant is unaffected. Hardly seems your place to decide and is the reason the provision was written as it was for employee certification. 

Belgarath, thank you for reminding me about how recordkeepers call the tune for many plans.

Could a plan’s sponsor preserve its choices by responding to such an implied-assent notice by specifying “otherwise”, knowing that if the sponsor changes its mind one can flip that yes-or-no switch later?

Or is there a practical reason not to do so?

13 minutes ago, JRSP533 said:

1. can you require a spouses medical records showing diagnosis?  (HIPPA)  

 

It is not a HIPPA issue as the plan administrator.  

14 minutes ago, JRSP533 said:

the reason the provision was written as it was for employee certification

The reason it was written that way is to not require employers to make that determination or hold up the relief.  That way, an employer can give the employee the loan or distribution when they ask and not disqualify the plan by doing so.  It is not to protect the privacy of an employee.

Understood. The spirit of why it was written that way was to not have assistance requests be overscrutinized and to allow people access to their money. 
 

That being said, what is a plan administrators concern with fraudulent claims since the provision is so broad on purpose?

Another piece of food for thought. The bill states “quarantine” or economic loss. What if a spouse has self quarantined from family members leading to child care issues and on and on and on. What is quarantine or diagnosis when people cannot be tested due to limited healthcare resources. -Why the bill is vague. 

1 minute ago, JRSP533 said:

What is quarantine or diagnosis when people cannot be tested due to limited healthcare resources. -Why the bill is vague. 

its not vague.  Individual diagnosed is (I) Spouse diagnosed is (II) 

(III) is the individual experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury (or the Secretary’s delegate).

The individual cannot claim hardship due to spouse being quarantined (without a diagnosis), but could claim hardship if individual is quarantined or cant go to work due to lack of child care

4 minutes ago, JRSP533 said:

The bill states “quarantine” or economic loss.

No, the bill states adverse financial consequences as a result of being quarantined, etc. 

Hi Peter - I certainly believe that a plan sponsor could say "no" - I haven't even considered yet whether if they say "yes" they can subsequently say no for accrued benefit - is this a 411(d)(6) protected benefit? I haven't considered or looked into that aspect. 

I too have not considered those cutback questions.

But a general sense that it’s often harder, not only legally but also practically, to take something away, is among the reasons some plans decide not to add such an optional provision until, at least, there is someone who would use it.

A good point!