2021 distribution under 2020 CRD rules??

A participant submitted a CARES distribution request in November 2020. The request was valid and in good order, however the recordkeeper did not process it. The recordkeeper is a large national bundled provider.  The plan sponsor was upset and has been in an argument with the recordkeeper since it was not processed timely. The solution from the recordkeeper is to process the CRD today and issue a 2020 1099R and call it a CRD. The recordkeeper will file a VCP submission asking the IRS to approve a 2021 distribution based a procedure error since the paperwork was received in good order and the recordkeeper failed to process it. Apparently, this happened with multiple plan sponsors because the recordkeeper is filing a VCP submission of behalf of multiple plan sponsors. (note - the participant does not qualify for any other type of in-service distribution).

Does the IRS have authority to approve a VCP submission to treat a 2021 distribution as a CRD due to the recordkeepers error?

Thank you

That's a good question. I'm not sure even the IRS knows the answer. I guess you could be correcting a failure to provide benefit when due. That is the participant had a valid election to receive a distribution under the plan that was not processed due to clerical error and is no longer available due to CARES Act expiration at 12/31/20.

I would think this is something that could be fixed by VCP but I'm not sure it fits into an easy check box example in the rev proc.

VCP can give the plan relief from operational issues. In other words, if the VCP is granted, the plan can't be disqualified for allowing the distribution to be treated as a CRD even though it was paid in 2021.

I don't believe that any IRS departments outside TEGE are obliged to honor the VCP though. Meaning that there is no guarantee that the participant would be allowed to treat the distribution as a CRD on their taxes.

If this is really a somewhat widespread issue (and I'll take your word for that, WCC), and if the IRS really is willing to give relief, i.e., to treat a 2021 distribution as an 2020 because it SHOULD have been made in 2020, which seems pretty bold to me, then I think they will have to put out a notice or something else on it, set forth standards, etc. That would be the only way to uphold uniformity and fairness in application of the law (and would lighten the VCP group's workload!).