It is nice to be able to come back up for air and take the time to write again. Conni and I are both fine, by the way. The only COVID hardship we seem to be personally dealing with now, fortunately, is lack of sleep…..Oh, and yes, for those inclined, you will be able to listen to this post as a podcast by going to the sidebar-which, by the way, also discuss my 18 year old sourdough starter….
IRS’s Notice 2020-50 is actually a nice piece of work by IRS and Treasury, as the CARES Act terms really had to be unpacked piece by piece. The drafters had to resolve a number of issues, and they did so in helpful detail.
There is so much detail in there, you probably could write a a chapter on the actual implementation of all of those elements addressed. What I thought may be useful to discuss is what happens when an employer chooses NOT to offer the CRD relief under the CARES Act. A surprising number of employers have taken this approach. But the employer’s decision is not the final word on this matter, because the statute grants participants specific tax benefits regardless of the sponsor’s choice. So what does this actually mean for participants?
- Employer chooses not to permit CRD distributions at all.
Consistent with its past position on disaster related distributions, IRS and Treasury have taken the position that an employer can choose to whether or not offer CRD distributions from the plan. Though I believe they could have legitimately taken the other position (that is, the employer had no choice), this is clearly the more conservative approach. Wisely, however, IRS has also said, that the employer must uniformly deny (or offer) CRD treatment under the plan.
Notice 2020-50 also made it clear that the employer cannot prevent the participant from claiming CRD tax treatment on (most) distributions the participant otherwise does take during the relief period, even where the employer has chosen not to “opt” for CRD relief. Thus, most participant distributions (except for things like corrective distributions) will be exempt from the 10% penalty tax, will be eligible to be taxed ratably over 3 years, and be able to rollover that amount. Even hardship distributions or RMDs, which typically cannot be rolled over, will still be eligible for rollovers- even taxation from defaulted loan offsets will be afforded this treatment (but not deemed distributions from defaulted loans which have not been offset).
It does not appear that the participant has to file a CRD certification with the plan administrator to get this favorable tax treatment, they just have to be able to prove they meet the (newly expanded, thank you!) CRD standards.
Obnoxiously, the employer can still file a 1099-R with the notation saying that this is an early distribution with no exception-and the 20% will be withheld-but the participant can offset this by filing the 8915-E.
- CRD Rollovers
Even if the employer does not extend CRD coverage under the plan, if the plan accepts rollovers, it will still have to accept the rollovers back into the plan of distributions the participant has treated as CRD. All the recalcitrant employer can do to stop these rollovers is to cease all rollovers
- Employer doesn’t expand CRD to $100,000.
Even if the sponsor doesn’t offer CRDs, or limits them below $100,000, the participant still has an individual limit of treating distributions from all other plans as CRDs. So, for example, where the employee maintains an 401(k) account with a former employer (or, as is often the case in the 403(b) market, maintains contracts from all sorts of former employers) they can still take distributions from those accounts and claim CRD treatment on the first $100,000 from those account-even without employer approval of CRD treatment.
- Employer does not institute loan payment suspension
I had blogged on this point of loan suspensions earlier this year.This one is interesting, and I invite you to take a close look: The employer does not have to extend the loan limits under the CRD rules, and the IRS has taken the position that the employer does not have to suspend the requirements that loan payments still be made even though both the statute and Notice 2020-50 state that the due date for loans payments through December 31, 2020 “shall” be delayed for one year. But the Notice does not specifically address this issue of what happens when an employer fails to suspend, given the mandatory nature of the law.
What we are left with, I think, is something like this: assume that the participant fails to make a payroll-based loan repayment because they have short paychecks with insufficient funds to repay the required loan amount, yet the employer chose not to suspend the loan repayment rules. It would seem that, for tax purposes, there will not be a taxable deemed distribution, because CAREs extended that due date. However, if the plan, by its terms, forced a default because of this shortfall in payment- and then forced an offset of the participants account-it then becomes a taxable event. This loan offset then, it would seem, be treated as a CRD distribution which has the waiver of the 10% penalty, a 3year ratable taxation and the right to rollover the amount back into the plan.