Q: Do I have to offer CARES Act distributions?
Q: Is there a risk to the plan in offering (or not) CARES Act distributions?
Q: Which provisions are mandatory, and which are optional?
Q: How long will the provisions be in effect?
Q: Can we wait and add the provisions later if there is more demand/need?
Q: How are the Coronavirus Related Distributions (CRDs) different than regular hardships?
Q: If the plan doesn't offer loans now, will it be required to allow them?
Q: How are the CARES Act early withdrawals taxed?
Q: How does the participant recontribute the CRD to a qualified plan, and which qualified plans can receive the recontribution?
Q: Are we required to communicate this change (early withdrawals and enhanced loans) to participants similar to other plan provision changes?
Q: Will the vendor send out an advance notice to employees advertising the availability of CRDs?
Q: If a participant takes a new CARES Act loan for $100k, can they defer loan payments for a year?
Q: Do I have to offer CARES Act distributions?
A: No, the CARES Act distributions are optional forms of distribution that can be added by qualifying plans but are not required under the law.
Q: Is there a risk to the plan in offering (or not) CARES Act distributions?
A: The decision as to whether to offer (or not offer) CARES Act distributions is a settlor one, meaning that either decision does not create fiduciary risk to the committee charged with governance. An employer may wish to assess the financial risks the COVID-19 virus creates for their workforce versus the damage that in-service distributions create for retirement preparedness.
Q: Which provisions are mandatory, and which are optional?
A: Guidance may be needed to determine if any provisions are mandatory. The suspension of RMDs for 2020 appeared to apply to all plans, but some questions remain as to whether a plan sponsor could elect not to offer this. Operationally, some vendors are requiring participants to opt-out of receiving their RMDs, while other providers have suspended them and asked participants to contact them if they wish to receive a non-RMD payment. The CARES Act also provides the opportunity for participants to defer their plan loan payments for up to 12 months. Further guidance may be needed on this as well, but the loan provision appears optional.
The CARES Act also provides for two features that are discretionary and should be reviewed carefully: (1) Coronavirus Related Distributions (CRDs) and (2) Coronavirus Related Loans (CRLs).
Q: How long will the provisions be in effect?
A: The availability of CRDs would expire at the end of 2020 for plans that allow them. Plans that provide for CRLs would see the increased limits expire 180-days after the passage of the law, which was on March 27, 2020.
Q: Can we wait and add the provisions later if there is more demand/need?
A: Yes. A plan sponsor can add optional CARES Act provisions anytime during the eligibility of such benefits.
Q: How are the Coronavirus Related Distributions (CRDs) different than regular hardships?
A: CRDs carry some improved tax and repayment features not contained in Hardship Withdrawals.
Q: If the plan doesn't offer loans now, will it be required to allow them?
A: No. Plans are not required to provide for plan loans.
Q: How are the CARES Act early withdrawals taxed?
A: The tax on the distribution is paid over three calendar years. We are awaiting further guidance on at what rate the distributions will be taxed.
Q: How does the participant recontribute the CRD to a qualified plan, and which qualified plans can receive the recontribution?
A: They are contributed back to the plan as if it were an eligible 60-day rollover. However, the plan must accept rollovers to provide for a participant to repay their CRD.
Q: Are we required to communicate this change (early withdrawals and enhanced loans) to participants similar to other plan provision changes?
A: Any new plan provisions would typically be required for communication in a Summary of Material Modification (SMM). SMM’s are required 210 days after the close of the plan year for which the modification was adopted. As a result, the only required communication may not occur until after the expiration of any required or optional provisions in the CARES Act. No special notification is required, but you may wish to review any voluntary notices that your vendor may intend to distribute.
Q: Will the vendor send out an advance notice to employees advertising the availability of CRDs?
A: Each vendor is still formulating a communication strategy and supporting materials relative to the provisions of the CARES Act. Generally, providers are electing not to “promote” CRDs in favor of on-demand information for plans that allow for CRDs and participants that may request one.
Q: If a participant takes a new CARES Act loan for $100k, can they defer loan payments for a year?
A: Yes. Assuming the plan elects to provide for loan deferrals, a participant could take a CRL and then elect to have their payments deferred.
UPDATE on May 7, 2020: The IRS has now published its Q&A tackling questions related to coronavirus-related distributions, loans, and who is a "qualified individual" that can take advantage of these provisions. To read their Q&A, click here.