Having worked with many retirement plans over the years, I’ve observed something universally predictable: there will be employees who seek withdrawals prior to retirement. As plan administrator, you are tasked with ensuring that retirement plan distributions are made in accordance with both the law and the plan’s provisions and doing the best to meet the needs of your employees. This is true regardless of the nature of the withdrawal.
Extraordinary circumstances have prevailed in 2020. Extraordinary circumstances call for extraordinary measures. Hence, the CARES Act (the Act), which allows for up to $100,000 of Coronavirus-related withdrawals. The main benefit under the Act is avoidance of the 10% premature distribution penalty, which normally applies to early withdrawals. IRS Notice 2020-50 (the Notice), issued June 2020, provides detailed guidance to employers/plan administrators as they navigate these new distributions. I have elected to omit the definition of a qualified individual under the Act, as that information is readily available to most readers.
The law is unusually liberal in its provisions, and in some ways challenging to the plan’s administrator.
The following are some tips based on guidelines within the Notice:
- First, the plan should be amended in order for employees to take Coronavirus-related withdrawals. Absent amendment, if a distribution is made that does not otherwise comply with plan provisions
(provisions for hardship distributions, for example), the withdrawal could be considered impermissible unless the plan is amended no later than the last day of the first plan year beginning on or after January 1, 2022. If there is no intention to amend the Plan, any distributions requested by participants for relief under the Act should be limited to distribution rules that exist at the time of withdrawal. Note, however, that the employee may still elect to treat the withdrawal as Coronavirus-related to avoid the 10% penalty.
- The Act provides that the amount of the withdrawal may be in excess of the amount of the participant’s need including taxes. The employer is not obligated to document that there was no part of the distribution that was made in excess of the forgoing. This is contrary to hardship distribution rules. So extra care is needed to identify the type of distribution being made, and the documentation required.
- Participants may recontribute Coronavirus-related withdrawals. This may be done at any time in a 3-year period for any portion of the distribution, assuming that the plan accepting the recontribution is permitted to accept eligible rollover contributions. The administrator of the plan accepting the recontribution may rely upon the employee’s certification of satisfying the conditions of a qualified individual. Participants who recontribute in a year following the year in which the distribution was taxable should amend his or her tax return for the year of the distribution in order to be made whole from a tax standpoint.
- Employers/administrators should note that reliance on employee certifications of being a qualified individual is acceptable, except when the employer/administrator has actual knowledge to the contrary.
- Employers/administrators may develop reasonable procedures for identifying which withdrawals are treated as coronavirus-related withdrawals, but if any withdrawals under the plan are treated as Coronavirus-related, the plan must be consistent in its treatment of similar withdrawals.
As always, you should consider contacting professionals who regularly consult on retirement plan transactions. Feel free to contact us if you have any questions.