Compliance May 22, 2020

Tips for When the QDRO Process Is Held Up

With court closures caused by the COVID-19 pandemic, plan sponsors may consider modifications to qualified domestic relations order processes.

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Retirement plan sponsors and providers have processes in place for qualified domestic relations orders (DROs) that may be held up right now because the coronavirus pandemic has caused court closures.

There are requirements for a DRO to become qualified and some orders may include errors that will require corrections. If that is the case, there may be no other recourse than to wait until courts reopen to continue the process. For example, if the DRO requires a type or form of benefit not provided under the plan, such as a monthly payment when none is available in the plan terms, the DRO will have to be recrafted and re-approved by a court.

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A blog post from law firm Morgan Lewis & Bockius LLP notes that many retirement plans require a certified copy of a DRO as part of the procedure for processing QDROs. “To address this issue, plans might consider adopting temporary procedures that allow for the continued qualification and processing of QDROs during these extraordinary circumstances without creating permanent exceptions to their normal QDRO procedures,” it says.

If a plan sponsor chooses to adhere to its QDRO procedures that require a certified order, payment of benefits to participants and alternate payees may be held up for an indeterminate period. This is why Morgan Lewis attorneys suggest a plan administrator might want to consider modifications to its QDRO procedures to allow for the continued qualification of DROs during the COVID-19 crisis, or in any situation when a certified copy is not available due to court closures or other extraordinary circumstances.

Two modifications the attorneys suggest are representations from the parties—the attorneys or the participant and alternate payee themselves—and an independent verification by the plan administrator. “Under the party verification approach, the plan administrator could consider accepting signed representations from the parties, under penalties of perjury, that the order being submitted is a true and correct copy of the final order filed by the court, that a certified copy is unavailable and that the circumstances make it impossible to submit the certified copy. Under the plan administrator verification approach, the plan administrator could access the court’s electronic filing system to confirm that the version of the order submitted by the parties is identical to the order filed by the court,” the blog post explains.

The attorneys add that the plan administrator could require that the parties submit a certified copy of the court order when it becomes available, but they note that the follow-up could be an administrative burden.

Compliance May 22, 2020

Implementation of Coronavirus-Related Distributions in DB Plans

DB plan sponsors may want to offer coronavirus-related distributions under the CARES Act, but should understand certain rules before doing so.

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Provisions in the Coronavirus Aid, Relief and Economic Security (CARES) Act don’t only apply to defined contribution (DC) plans; some apply to defined benefit (DB) plans as well. For example, DB plan sponsors may offer coronavirus-related distributions (CRDs) to participants, subject to certain plan and regulatory rules.

The provisions for CRDs contained in the relief bill apply to DB plans in the same way they do to DC plans, as long as pension plan sponsors had previously allowed for in-service distributions, says Brian Donohue, a partner at October Three in Chicago.

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Participants in both types of plan qualify for a distribution if an individual was diagnosed with COVID-19, had a spouse or dependent who was, or experienced adverse financial consequences as a result of the COVID-19 crisis. Plan sponsors may rely on participant self-certification that the participant has been affected. “If employers are worried about employees claiming hardship, it’s not their responsibility to monitor that,” Donohue states.

Hitz Burton, partner for legal consulting and compliance at Aon, says DB plan sponsors can only provide coronavirus-related distributions to those otherwise eligible for a distribution under the Internal Revenue Code, such as a terminated, vested or retirement-eligible former employee, as long as the distribution is permitted by plan terms. Additionally, coronavirus-related distributions can be used in a DB plan that permits distributions at attainment at age 59 1/2 or older as a de-risking opportunity, he adds.

The CARES Act does not change when a distribution may be made to a DB participant, October Three explains in a post on its website. However, for other participants, including those “furloughed”—but not permanently “separated from employment”—active employees older than age 59 1/2 and retirees, the answer is more complicated. The firm recommends DB plan sponsors review these issues with counsel if they are interested in making 2020 lump-sum distributions to one or more of these groups. “We are going to need some guidance from the DOL [Department of Labor] in terms of model language, because that will need to be modified this year when it comes to these distributions,” Donohue says.

Since the CARES Act removed certain requirements, these new distributions are an attractive option for some, he adds. For example, while traditional in-service distributions are subject to a 10% early withdrawal tax, a CRD is not. Additionally, CRDs can be included in taxable income over a three-year period and may be recontributed to the plan during this period.

DB plan sponsors that consider adding a CRD option to their plans should be mindful about certain provisions. For example, the $100,000 limit on these distributions must be monitored and applied across qualified plans—both DB and DC—that are sponsored by the employer, Burton notes. “Because of the likely difficulty and associated compliance risk with monitoring the $100,000 limit across multiple plans, Aon generally recommends that a sponsor considering a CRD provision only do so for a single qualified plan within its controlled group,” he adds.

DB plan sponsors offering lump sums today, but not administering a CRD provision for 2020, also have an important disclosure point to consider, Burton warns. The information provided to participants in the current IRS safe harbor special tax notice has not been updated to describe important information regarding the tax-favored treatment available to qualified individuals affected by COVID-19. Under the CARES Act, for example, qualified individuals who receive an eligible rollover payment (e.g., lump sum) in 2020 can recognize the taxable income over a three-year period. “As a result, we believe that plan sponsors should consider providing all participants with additional information about how the CARES Act may impact the federal income taxes that they will owe,” he says.

Burton says Aon believes that CRDs in DB plans will be most prevalent in those plans that already offer lump-sum distributions—whether permanent or temporary—including cash balance and other hybrid pension plans. CRDs may also be offered as part of an early retirement or lump-sum window program in 2020.

Donohue notes that DB plan sponsors have long been crafting efforts to push participants to take lump sums instead of pension payments. Paying out lump sums reduces risk for the plan, and it reduces the overhead cost associated with Pension Benefit Guaranty Corporation (PBGC) premiums. Participants who may not have chosen a lump-sum distribution when the opportunity was offered to them before may do so now to reap the tax advantages of CRDs, he says.

But, in 2020, there’s a whole new set of reasons to move money out of pension plans, Donohue says. “Just how we’re seeing business loans and unemployment checks, everyone is just in this push to move money into the economy to continue the flow of things,” Donohue explains. “DB sponsors are looking at this opportunity to be a part of that, to try to provide lifelines to participants.”

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