Coronavirus DIstribution Timing

Participant submitted the paperwork for a Coronavirus Related Distribution on December 24, 2020. The assets were transferred out of the participant account and plan trust account on December 26^th. They were transferred to a paying agent. The paying agent didn’t send out the distribution until January 4, 2021. 

The paying agent is refusing to treat this as a coronavirus related distribution because the check wasn’t sent until January 4, 2021. (Past the 12/31 CRD deadline.) They will be issuing a 2021 1099 distribution for the full $100,000. Thus the participant will have to incur immediate tax consequences and penalty for taking this money out.  

Has anyone else had any issues like this? We are trying to build a case that because the money left the participant account and the plan’s trust account on December 26^th that this should be credited as a 2020 Coronavirus Related Distribution and the paying agent should treat it as such.  

I don't have much to offer except to say I agree with you.  I guess that's why I'm instintively reluctant to use a paying agent.

Does their attitude invalidate the distribution entirely - was there a distributable event other than a CRD?

A paying agent is just that, an "agent", and significantly, an agent of the plan, not the participant.  As such funds held by the paying agent still belong to the plan until properly disbursed to a participant.  So the paying agent is likely correct.   But paying agents typically have a time-lag, they need to insure they've received good funds before disbursement, plus you throw in the holidays and the normal year-end crush to get plans distributed and paying agents are very busy in December.  They will usually communicate a cut-off date for distributions to be made by 12/31.  I would imagine their cut-off date was well before 12/26.  And given that 12/26 was a Saturday, wire transfers normally don't occur on weekends and bank holidays, so that would make it 12/28.

So it really comes down to communication.  Did the paying agent represent that it could be paid out by 12/31?  Did the paying agent advise its cut-off date for year end distributions?  Did the plan or TPA communicate to the paying agent the need to rush this one thru by 12/31?  Did the plan communicate any sort of timing deadline for requesting a CRD?  

Seems to me the paying agent turned this around really quickly given that 1/4 was only the 4th banking day after 12/28.   It really comes down to what was communicated such that all parties would have proper expectations and be able to plan accordingly. 

shERPA's analysis is spot-on.  Definitely some issues that should have been communicated and cleared up ahead of time.

I guess that means I am changing my answer.

While I agree with the analysis provided by shERPA, I've also seen in practice that the "distribution" occurs at the point in time that the money is removed from the trust and paid into a common distribution account.  I work for a bundled service provider that uses a single distribution account for processing of distributions from our group annuity book of business (we are the annuity provider as well), and book the distribution as occurring at the time the money leaves the group annuity.  We also have an NAV book of business trusteed by an independent institutional trust company (Matrix, if you care), and they issue a 1099 based on the date the check is cut - which may be several days after liquidation of the assets from the trust.

This was an issue we raised through various trade associations to get IRS "leeway" in those cases where a proper request was submitted prior to 12/30, but due to r/k issues or errors, the check wasn't cut until after the first of the year.  The IRS did not provide guidance one way or the other - but we are aware of some participants (in the NAV book of business) that have claimed the distribution as a COVID distribution on their 1040 form, with documentation that the request was made timely and "not the fault of the participant."  We'll see if that flies or not....

This might come down to where the funds actually were on December 30 ( PS- this is the actual cut off date for CRDs. This might be crucial when making the case). Were the funds in an account considered plan assets at end of business on December 30th?
@MoJo- there was one particular instance where the IRS said no.  The key phrase was "actually distributed during the calendar year" . ( A firm contacted the IRS on behalf of their client, anonymously. Participants had submitted RMD requests by December 31 that were not processed due to year-end volume).

Just now, Appleby said:

This might come down to where the funds actually were on December 30 ( PS- this is the actual cut off date for CRDs. This might be crucial when making the case). Were the funds in an account considered plan assets at end of business on December 30th?
@MoJo- there was one particular instance where the IRS said no.  The key phrase was "actually distributed during the calendar year" . ( A firm contacted the IRS on behalf of their client, anonymously. Participants had submitted RMD requests by December 31 that were not processed due to year-end volume).

First, correct, 12/30 was the deadline.  Second, "actually distributed" is the question - and as you say, it depends on where the assets are....  Some participant will the guinea pigs here - because we know of some who are taking the position that a 12/x request with a 1/x check date is still a CRD....

4 minutes ago, MoJo said:

First, correct, 12/30 was the deadline.  Second, "actually distributed" is the question - and as you say, it depends on where the assets are....  Some participant will the guinea pigs here - because we know of some who are taking the position that a 12/x request with a 1/x check date is still a CRD....

Yes, yes- fi true. This would be quite interesting. The IRS generally use their document matching system for distributions- and if the 1099-R does not match the 1040 and Form 8915-E, it will likely generate a CP2000 notice. This is where the argument could be made by the client's CPA. But, it is risky as there is no way to know how they will respond.
 Another question that comes to mind- not necessarily for this case, but in general. When something like this happens for an amount intended to be a CRD, does the paying agent check back with the plan to make sure that the distribution is still approved? Because, being OK to distribute in 2020 by 12/30 as a CRD does not necessarily mean OK to treat as a 2021 distribution- since CRDs could be distributed without requiring a triggering event. And, did they perform withholding? There is no mandatory W/H for CRDs, but a 2021 distribution would be subject to W/H is eligible to be rolled over. @Christine Roberts- questions like these could be helpful for your case, or it could produce the opposite result- which is, if the distribution should not have been made because there was no triggering event, will the plan need to reclaim the funds?.

10 minutes ago, Appleby said:

When something like this happens for an amount intended to be a CRD, does the paying agent check back with the plan to make sure that the distribution is still approved? Because, being OK to distribute in 2020 by 12/30 as a CRD does not necessarily mean OK to treat as a 2021 distribution- since CRDs could be distributed without requiring a triggering event. And, did they perform withholding?

Good in theory.  IMPOSSIBLE in practice.  We process approx 500 distributions daily in our group annuity business - of all kinds.  Once queued, there is virtually no way to stop it.  Not sure how many are processed by the institutional trustee handling that side of the business - but they provide the same services to tens of thousands of plans (beyond just our book) and I assume it is the same situation....

Withholding is base don what is keyed in when the entered into the queue.  Downstream is so automated, it may have been zero (and that cold also be a withholding mistake).

I am not adding a lot but I will go with the communication crowd.    We tell all of our clients about the drop dead date for getting checks cut and know they will be done by 12/31.   The drop dead date is NEVER in the week between  Christmas and New Years.  It is always before that date.   We will process payments beyond the drop dead date and often times the checks get out on time but we make it clear if they don't people were told and the chips will fall where they may.

While this doesn't solve the current problem I think that is where the original questioner's firm needs to go moving forward with procedures.   They need to work out the drop dead date and let everyone know what it is.   I have never had a client say that is unreasonable.  

42 minutes ago, ESOP Guy said:

I am not adding a lot but I will go with the communication crowd.    We tell all of our clients about the drop dead date for getting checks cut and know they will be done by 12/31.   The drop dead date is NEVER in the week between  Christmas and New Years.  It is always before that date.   We will process payments beyond the drop dead date and often times the checks get out on time but we make it clear if they don't people were told and the chips will fall where they may.

While this doesn't solve the current problem I think that is where the original questioner's firm needs to go moving forward with procedures.   They need to work out the drop dead date and let everyone know what it is.   I have never had a client say that is unreasonable.  

Quite right.  And as a TPA in situations where a client absolutely insisted on a distribution after the drop dead date but by 12/31, we would tell them they need to do it themselves and not use the paying agent.  If there is no withholding then it's just a matter of a manual 1099-R.  If there is withholding, well, fuggedaboutit.  Sometimes clients would do it anyway and ignore the withholding requirement.  Their choice, we just tell 'em the rules and the consequences. 

2 hours ago, ESOP Guy said:

I am not adding a lot but I will go with the communication crowd.    We tell all of our clients about the drop dead date for getting checks cut and know they will be done by 12/31.   The drop dead date is NEVER in the week between  Christmas and New Years.  It is always before that date.   We will process payments beyond the drop dead date and often times the checks get out on time but we make it clear if they don't people were told and the chips will fall where they may.

While this doesn't solve the current problem I think that is where the original questioner's firm needs to go moving forward with procedures.   They need to work out the drop dead date and let everyone know what it is.   I have never had a client say that is unreasonable.  

Yup.  We had a drop dead date of 12/7 for "guaranteed" check cut by the deadline.  Best efforts for anything after that (and most were timely processed).  There still were a few that were "processed" in December, but a check got cut in January....  Money spent.  Tax consequences unknown - and unknowable until the IRS pings one of the participants.

"Stuff" happens.