Seyfarth Synopsis: The IRS has issued some initial guidance on the coronavirus-related relief for retirement plans (and IRAs) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) in the form of Q&As on its website. Most of the Q&As address coronavirus-related distributions (“CV Distributions”), while one Q&A provides some IRS insight relating…

Seyfarth Synopsis: On March 27, 2020, the House of Representatives followed the Senate’s lead in voting overwhelmingly to pass the Coronavirus Aid, Relief, and Economic Security (CARES) Act (the “Act”), which the President immediately signed into law. This post highlights the defined contribution retirement plan provisions contained in the law. Click here to review the executive compensation provision contained in the law; click here to review the health and welfare plan provisions; and click here to review the defined benefit plan provisions.

• Tax-Favored “Coronavirus-Related” Withdrawals. Coronavirus-related distributions (“CV Distributions”) from defined contribution retirement plans (including IRAs) will not be subject to the 10% penalty that normally applies to early withdrawals. An individual may elect to include the amount of the qualified CV Distribution(s) in income over a three-year period.

Observation. While it looks like this is probably intended to be a new distribution type, we think that it is a little unclear based on the language in the Act. Some additional guidance would be helpful with respect to whether this is a new distribution right, or if it is just an exception from the penalty tax for otherwise eligible distributions that fit the criteria, with repayment rights. There is language in the Act indicating that a CV Distribution would be deemed to satisfy the 401(k), 403(b) and 457 plan distribution timing rules, which seems to support the position that this is a new distribution right. If this is a new in-service distribution right, then it should be an optional provision. Plan sponsors are not required to make in-service withdrawals available (e.g., age 59½ or hardship), so we would expect the same to apply here.

Similar to the disaster relief withdrawals provided in the past for other types of disasters, an individual may choose to repay all or a portion of the CV Distribution(s) to a defined contribution retirement plan or IRA within three years. A participant who chooses to repay is treated as having received the CV Distribution in an eligible rollover distribution, and then directly transferring it tax-free to the eligible retirement plan.

Observation. It appears that repayments are made to the plan or IRA by a participant on an after-tax basis, but until the IRS issues additional guidance, we do not know for sure how the repayment will be able to be made. If repaid to an IRA, it is not clear whether the repayment is considered a rollover for purposes of the one rollover limit per year that applies to IRAs, although the repayment of other types of disaster distributions have historically not counted toward the rollover limit.

There are a number of conditions that must be met in order to qualify for this relief:

• • CV Distributions may be taken no earlier than January 1, 2020, but before December 31, 2020.

Observation. This relief may be adopted retroactive, applying to CV Distributions occurring back to January 1, 2020. When communicating this relief to participants, plan administrators may want to consider informing participants that they may be entitled to relief in 2020 for the 10% penalty tax, provided that they can certify that a distribution made earlier in 2020 was a CV Distribution.

• • Total CV Distributions may not exceed $100,000, and may not be rolled over. When determining whether the limit has been exceeded, you take into account all plans maintained by the employer and members of its controlled group.

Observation: This will require coordination among various plans in an employer’s controlled group.

• • CV Distributions must be made to an individual who is diagnosed with the SARS-CoV-2 virus or with coronavirus disease 2019 (COVID-19), or to an individual whose spouse or dependent is diagnosed with the virus or disease. Alternatively, an individual is eligible for this relief if he or she experiences adverse financial consequences stemming from the virus or disease as a result of being quarantined, furloughed, laid off, having reduced work hours, being unable to work due to lack of child care, the closing or reduction of hours of a business owned or operated by the individual or other factors determined by Treasury.

Similar to earlier versions of the Act, diagnosis of the virus or COVID-19 must be made pursuant to a test approved by the CDC.

Observation. This would appear to exclude other types of FDA-approved tests that are being fervently developed in light of the shortage of CDC-approved test kits. However, the Act provides that plan administrators may rely on the employee that these conditions are satisfied, so it appears that actual documentation showing diagnosis of the virus or COVID-19, or of adverse financial consequences is not required. Plan administrator’s may want to discuss how this certification process will work with the plan’s third party recordkeeper. In addition, the Act refers to an “employee” when describing the certification requirement. Based on other language in the Act, it appears that CV Distributions are available to both active participants as well as terminated participants, but it would be helpful if this was clarified.…
Continue Reading CARES Act Relief: Defined Contribution Plan Provisions

Seyfarth Synopsis: On Friday, March 27, 2020, in light of the far-reaching impact of coronavirus, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes some relief provisions for tax-qualified defined benefit pension plans. Click here to review the executive compensation provision contained in the law; click here to review the…