CARES Act Considerations: CRDs, RMDs, Taxes and More

During a recent dialogue with the editorial team at PLANSPONSOR, two expert attorneys offered helpful words of guidance to retirement plan sponsors and service provider fiduciaries when it comes to meeting the requirements and opportunities presented by two key pieces of legislation: the Setting Every Community Up for Retirement Enhancement (SECURE) Act and the Coronavirus Aid, Relief and Economic Security (CARES) Act.

The full recording of the hourlong discussion with Percy Lee, associate attorney at Ivins, Phillips & Barker; and Aliya Robinson, senior vice president of retirement and compensation policy at the ERISA Industry Committee (ERIC); is available here. Presented below are edited highlights from the discussion, focused on the critical topics of required minimum distributions (RMDs) and the tracking of different types of hardship withdrawals, particularly coronavirus-related distributions (CRDs). The speakers also addressed the importance of tracking part-time employees’ working hours during 2021, 2022 and 2023, given that these workers must become eligible for retirement plan participation after three years of service—assuming they reach 500 hours in each year.

Percy Lee on Part-Timer Workers

Looking back to the SECURE Act may feel like a lifetime ago for many plan sponsors. It became law in late 2019, prior to any real discussion of the pandemic. Very importantly, it delayed the RMD age from 70.5 to age 72.

That was perhaps the most important plan-related change made under the SECURE Act. Other important changes included permitting penalty-free withdrawals for a birth or adoption, expanding eligibility for long-term, part-time employees in 401(k) plans, and changing the rules for providing lifetime income disclosures and portable lifetime income products. And, of course, the SECURE Act established a new marketplace of pooled employer plans (PEPs), along with making other changes to health and welfare plans. Plan sponsors should be paying attention to all of these things.

Practically speaking, for this audience, one takeaway is that they should immediately begin tracking part-time employees’ hours. The SECURE Act says that plans must allow long-term, part-time employees to participate after they have clocked three consecutive 12-month periods with 500 or more hours of service. For this purpose, hour counting started on January 1, 2021. The same date applies even for plans and employers operating on a non-calendar-year basis. This means that employees who work 500 hours per year in 2021 through 2023 will become newly eligible in 2024, and they must be allowed to participate.

Of note, employees who are required to be covered by SECURE Act’s expansion may receive, but are not required to receive, matching employer contributions. Furthermore, they can be excluded for nondiscrimination testing purposes. There are still some places where we hope to get clarifying guidance, but, for now, the bottom line for employers is to prepare for 2024 by starting in 2021 to track part-time employees’ hours.

Lee on RMD Confusion

Based on my practice, there is some serious RMD confusion out there right now, in part because of what the SECURE Act did versus what the CARES Act did. Simply put, the RMD date is the deadline when distributions have to begin, and so by deferring the RMD point from 70.5 to 72, the SECURE Act allowed participants to wait longer to start those distributions. However, we must keep in mind that individual plans are allowed to have earlier required distribution ages. In effect, they could ‘grandfather’ in the 70.5 RMD age if they so choose.

Another point of emphasis is that, even after the SECURE Act’s passage, RMDs that had already previously started at the required age of 70.5 cannot be stopped. Under the law before and under the law now, once RMDs commence from an account, they must continue. What has caused confusion is that the CARES Act provided for a pause in 2020 for RMDs that had already begun. To be clear, pausing RMDs and outright stopping RMDs are not the same thing.

The CARES Act also added to the confusion in that it included specific provisions that provided special retroactive rollover treatment for certain very specific RMDs that had been started in 2020 and which would have been treated as RMDs were it not for the CARES Act. It’s important to slow down and review all of these interconnected requirements.

Aliya Robinson on Hardship Distributions and Resubmissions

Whether we are talking about provisions in the SECURE Act or in the CARES Act that allow people to recontribute dollars, to either catch back up in terms of retirement readiness or to avoid taxation of hardship withdrawals, this is going to present a real logistical challenge to plan sponsors. Take, for example, the SECURE Act provision that allows people to withdraw funds penalty free in the case of a birth or adoption, while giving them the option to recontribute the funds later.

First of all, a record is required on the front end, when the money is exiting the plan. This initial record is easy enough to create, because the various pieces of guidance confirm that plan sponsors can generally rely on self-certification on the part of plan participants, unless they know for a fact that the participant is making false representations. However, that record has to be labeled accurately as being a withdrawal for a birth/adoption, versus, say, a normal plan loan or a coronavirus-related hardship distribution (CRD).

You have to put a system in place that can keep track of this over potentially a long time period, and then the bigger questions come up on the back end. If a person wants to recontribute a certain sum of money, how do you differentiate these dollars from other types of new contributions? Can the person contribute above the normal limits when part of their contribution is the repayment of such a distribution? Should it all go to the same account or must these dollars be segregated in terms of pre-tax or after-tax dollars? What if the money came from an after-tax fund in the first place? All of these questions and the related tax ramifications are complex. 

It’s going to be much easier to manage the expanded loans permitted by CARES, because that recordkeeping infrastructure is already in place. The CRDs, on the other hand, are a whole new distribution. It’s not a hardship withdrawal and it’s not a plan loan, so you need to set up different systems to make sure you can track it.

Robinson on CRDs and Retirement Security

Right now, we are past the time where you can take CRDs, but we have to ask about the process of paying them back. These distributions may be recontributed, but they aren’t required to be. In effect, the plan sponsors will have to be tracking all of this over the next three years and then declare at some point whether money that exited their plan did so in the form of a taxable distribution.

Stepping back, I think the bigger question and concern is the potential impact on retirement security. Are people going to pay back these distributions? It’s not clear. What we are hearing from plan sponsors is that they want to push plan participants to repay this money, but they don’t know how much they can actually make this push. At what point do they go beyond providing education and step beyond their role?

And what happens if you move from one employer to another employer? Are you allowed to pay money from an old plan into a new employer’s plan? There are some big open questions here, and we are going to be watching out for further guidance.