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We know that all parties involved in plan administration are struggling with the question of whether the employer or the participant have the CARES Act rights to 1) an extension of loan amounts (I think it’s the employers choice); 2) the right to suspend loan repayments (I think it’s the participants right, not the employers-can you imagine the ramifications of an employer choosing  a taxable default and 10% penalty, even if by default?); 3) the right to take a non-restricted CRD distribution (again, I think it’s the participant’s choice); and 4) the right to non-RMD treatment (again, I think it’s the participants choice and the tax impact is automatic).

But beyond these difficult questions (yes, I admit to getting my two cents in on each of these points) is the application of ERISA’s fiduciary rules to the determination of the status  of a participant as being eligible for CARES’ relief (let’s call it a COVID participant).

You are eligible to be a COVID participant (thus eligible for the relief) if:

  1.  you are diagnosed with the virus;
  2.  your spouse or dependent is diagnosed with such virus, or
  3. (in the exact words of the statute)are  “an individual who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or 25 operated by the individual due to such  virus or disease, or other factors as determined by the Secretary of the Treasury.”

I think we would all agree that the determination of whether or not an individual qualifies as a COVID participant would usually be  a determination that requires the exercise of discretion by a fiduciary, under ERISA Section 3(21).

As you also know, however, the CARES’ participant certification rule adds an odd twist into the mix:

“EMPLOYEE CERTIFICATION.—The administrator of an eligible retirement plan may rely on an employee’s certification that the employee satisfies the conditions of (the above rules)  in determining whether any distribution is a coronavirus-related distribution.”

Here’s where the problem seems to come in:  there is a bit of ambiguity in the third condition of eligibility: nowhere does it specifically mention the impact of the loss of employment or reduction in hours of the spouse of the participant in the calculation of what are the causes of the participant’s adverse financial circumstances.

Consider the following scenarios:

Case #1. A participant is still employed but has a reduction in hours which reduces her pay so she can’t make the rent. This clearly is an “adverse financial consequence,” and, as long as she certifies to this, she will get a Coronavirus related distribution (CRD)-along with the 3 years spreading of tax, the right to repay, and a waiver of the 10% tax penalty.

Case #2. A participant is still fully employed, is working at home due to a state order; but her husband has lost his job. They now cannot afford the rent, and she suffers an adverse financial consequence-indeed, she will have no place to work if they lose their apartment. She certifies that she has an adverse financial circumstance from being quarantined. Does the plan pay, as a CRD? There is a bit of contention on this point.

A few things to think about when answering that question:

  • A fiduciary doesn’t need to make that determination of COVID status. It is entitled to rely on the certification. Note that the statute does not impose even a “reasonable basis” or any other such standard.
  • Yet, directing payments out of a plan is still a fiduciary act, even with the certification. Only fiduciaries can authorize the payment of these funds.
  • The DOL has long held that the fiduciary has the obligation to override a participant’s decision, if it is imprudent. So isn’t the real question, then, whether or not the fiduciary should reject the participant certification?

Here’s where ERISA may be useful, absent guidance from the Treasury or the DOL. The fiduciary must act

with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.

Wouldn’t a fiduciary who relies upon the certification of the participant be judged by this standard? When you apply “under the circumstances then prevailing” standard, would not a fiduciary be hard pressed to challenge the certification especially given the pandemic and the remedial nature of the statute?

A fiduciary who challenged the certification based on the lack of specific spousal language in the statute will be faced with some hurdles. It would be denying a benefit, and would need to defend that through the ERISA claims and appeals process. Then the severe consequences of challenging the certification-and denying the certification- should also give a fiduciary pause. Denying it means that the participant may then not even be able to access the funds to prevent eviction.  Or even if that person is “lucky” enough to qualify for a typical hardship while still being employed:

  • there is a mandatory tax withholding of 20% on the withdrawal, so more funds will need to be withdrawn to make the rent payment;
  • the withdrawal will be fully taxed next April, at a time where there still may be financial struggles in recovering from this mess;
  • it is subject to the 10% penalty tax; and
  • the losses are permanent, as there is no right to repay those withdrawals to the plan.

It would seem that given the high stakes and the exacerbation of a participant’s adverse circumstances which would be caused by the denial, a fiduciary would be hard pressed to reject the certification.

A reasonable case could be made that the fiduciary not reject such a certification. But this decision is not without some risk: the IRS could claim-if Treasury fails to clarify the position, or fails to exercise its authority to “fill in” the missing spousal language under its authority granted under the statute,  that the CRD under these circumstances  was either a plan document or an operational error. That “error” would then need to be fixed under EPCRS, including VCP. That is the risk.

Somehow, it is difficult to accept that the IRS would dictate a correction under EPCRS which would force the return of the CRD or the treatment of the CRD as a standard hardship withdrawal under these circumstance.

None of this is easy. All of this is heartbreaking. And very real.