20% still required to be withheld from distributions?

We have a terminated 100% vested participant (under 59-1/2) who wants to take all of her money out of the plan as a cash distribution.  The plan has not adopted any of the CARES Act relief measures.  The participant is claiming that 20% is not required to be withheld since she is claiming she was impacted by COVID19.  But this is a distribution due to termination of employment, not an ISW.  

Is she correct?

Thanks

You can olny get out of the withholding if the Plan implements the CARES Act provisions and treats the distribution as COVID related.

The participant can by pass the withholding by rolling to an IRA and then closing the IRA if it is really important to them.

seconded

4 hours ago, Lou S. said:

You can only get out of the withholding if the Plan implements the CARES Act provisions and treats the distribution as COVID related.

It depends on what you mean by implementing CARES Act Provisions.  A plan that has not adopted any of the additional distribution options available under the CARES Act can, but is not required to, choose to treat distributions to qualified individuals as COVID related distributions, as long as it is applied consistently. What does the plan want to do? 

Notice 2020-50, Section 2C:
 

Quote

 

C. Treatment of distributions as coronavirus-related distributions

An employer is permitted to choose whether, and to what extent, to treat distributions under its plans as coronavirus-related distributions (as well as whether, and to what extent, to apply coronavirus-related plan loan rules described in section 5 of this notice). Thus, for example, an employer may choose to provide for coronavirus-related distributions but choose not to change its plan loan provisions or loan repayment schedules. Further, the employer (or plan administrator) is permitted to develop any reasonable procedures for identifying which distributions are treated as coronavirus-related distributions under its retirement plans. However, if, under an employer retirement plan, any distribution of an amount subject to § 401(k)(2)(B)(i), 403(b)(7)(A)(i),403(b)(11) or 457(d)(1)(A) is treated as a coronavirus-related distribution, the plan must be consistent in its treatmentof similar distributions. Accordingly, the amount of the distribution must be taken into account in determining the $100,000 limit on coronavirus-related distributions made under all the retirement plansmaintained by the employer. Even if, under a plan, a distribution is not treated ascoronavirus-related, a qualified individual may treat a distribution that meetsthe requirements of section 1.C of this notice as a coronavirus-related distribution on the individual's federal income tax return.

 

https://www.irs.gov/pub/irs-drop/n-20-50.pdf

13 hours ago, Kevin C said:

It depends on what you mean by implementing CARES Act Provisions.  A plan that has not adopted any of the additional distribution options available under the CARES Act can, but is not required to, choose to treat distributions to qualified individuals as COVID related distributions, as long as it is applied consistently. What does the plan want to do? 

Notice 2020-50, Section 2C:

Doesn't this mean that if an employer so chooses, the plan must be amended at some point?

45 minutes ago, Mike Preston said:

3 hours ago, Kevin C said:

It depends on what you mean by implementing CARES Act Provisions.  A plan that has not adopted any of the additional distribution options available under the CARES Act can, but is not required to, choose to treat distributions to qualified individuals as COVID related distributions, as long as it is applied consistently. What does the plan want to do? 

Notice 2020-50, Section 2C:

 

Doesn't this mean that if an employer so chooses the plan must be amended at some point?

Yes.

13 hours ago, Mike Preston said:

Doesn't this mean that if an employer so chooses, the plan must be amended at some point?

Maybe.  Does your plan document specify the withholding rules that apply to each type of distribution?  Our 401(k) VS document doesn't.  Unless the IRS gives us guidance otherwise, I wouldn't expect a procedural change to something that isn't addressed in the plan document to require an amendment. If the withholding change is contrary to your document language, I would expect an amendment to be required.

However, my point was that a plan is not required to implement other CARES Act provisions before the plan can treat distributions to qualified individuals as CRD. 

2 hours ago, Kevin C said:

Does your plan document specify the withholding rules that apply to each type of distribution?  Our 401(k) VS document doesn't.  Unless the IRS gives us guidance otherwise, I wouldn't expect a procedural change to something that isn't addressed in the plan document to require an amendment. If the withholding change is contrary to your document language, I would expect an amendment to be required.

Withholding isnt determined by the document though, it determined by the Code.  In order for the plan to treat a distribution as a CRD, it has to amend for CARES.  The reason you have voluntary withholding on a CRD is because it is not treated as a rollover eligible distribution.  Absent an amendment, the distribution in question (and most other distributions) would be rollover eligible and would require 20% withholding and 402f notice.  I don't see any room for maybe here.  Whether they would enforce the penalties for failure to provide notice and withholding is a different matter.

2 hours ago, RatherBeGolfing said:

Withholding isnt determined by the document though, it determined by the Code.  In order for the plan to treat a distribution as a CRD, it has to amend for CARES.  The reason you have voluntary withholding on a CRD is because it is not treated as a rollover eligible distribution.  Absent an amendment, the distribution in question (and most other distributions) would be rollover eligible and would require 20% withholding and 402f notice.  I don't see any room for maybe here.  Whether they would enforce the penalties for failure to provide notice and withholding is a different matter.

No wiggle room. No amendment, can't treat it as optional withholding. Or, what he said.

Amendments for SECURE and CARES are both due by the end of the 2022 plan year (2024 for governmental plans).  So, EVERY plan will be amended, regardless of their choices on CRDs.  I expect our document provider to include provisions for both laws in the same interim amendment.  The question really should be "will this need to be reflected in the 2022 interim amendment?".  To answer that, we'll have to wait until our document providers release their interim amendments.  With our document provider, if it does go into enough detail to include this, it should be just a matter of checking an extra box in the amendment.  That would mean the  employer has to sign the interim amendment rather than having it adopted by the document sponsor.  But, I don't see that as significant enough to drive an employer's decision about what to do with withholding for qualified individuals. 

3 hours ago, Kevin C said:

The question really should be "will this need to be reflected in the 2022 interim amendment?".  To answer that, we'll have to wait until our document providers release their interim amendments.

Kevin, I have the utmost respect for your opinions, to the point that I hesitate to disagree.  (And I don't know that I am disagreeing because I don't get where you are coming from here.)  What does the document providers' interim amendment have to do with this?  As you note, all plans have to be amended one way or another.  Even if whatever the sponsor wants is the default and doesn't need to be signed, it's still an amendment.  So I think the bottom line isn't what the doc provider offers, it is what the sponsor wants.  If the sponsor wants to to not withhold (now), then the plan has to be amended (by 2022) to allow CRDs.  Is there anything incorrect about that?

2 hours ago, Bird said:

So I think the bottom line isn't what the doc provider offers, it is what the sponsor wants.  If the sponsor wants to to not withhold (now), then the plan has to be amended (by 2022) to allow CRDs.  Is there anything incorrect about that?

I would only add that in addition to the amendment, if the sponsor wants to not withhold it would be some version of a partial adopter rather than a non-adopter since it has to be a CRD in order to not withhold.  If they are an adopter (partial or otherwise), I think they need to notify the participants of the availability and extent of what they will consider a CRD. 

On 7/17/2020 at 5:18 PM, RatherBeGolfing said:

I would only add that in addition to the amendment, if the sponsor wants to not withhold it would be some version of a partial adopter rather than a non-adopter since it has to be a CRD in order to not withhold.  If they are an adopter (partial or otherwise), I think they need to notify the participants of the availability and extent of what they will consider a CRD. 

Agreed