As expected, the recently enacted Coronavirus Aid, Relief, and Economic Security Act contains provisions providing affected workers with greater, more tax-favored, access to portions of their retirement savings. Although it will be possible to make Coronavirus-related distributions from 401(k)s, 403(b)s, IRAs and governmental 457(b)s, we are focusing here on governmental 457(b) plans.
In our last Focus on Public Benefits post, existing rules that may provide public employees access to their 457(b) accounts to receive distributions based on an unforeseeable emergency hardship were discussed. These rules remain in place; however, under the CARES Act, employees affected by the Coronavirus crisis — presumably everyone — will instead be able to take advantage of the following, more favorable, rules for CRDs:
- Generally, a CRD is a distribution made during 2020 to an individual who has contracted Coronavirus or who has suffered adverse financial consequences due to the Coronavirus outbreak, as specified in a to-be-issued guidance.
- According to the CARES Act, an employer will be able to rely on an employee’s certification that a requested distribution qualifies as a CRD.
- There is a limit of $100,000 that can be distributed as a single amount, or a part of a series of distributions, on a CRD-basis from the eligible plan or plans of a single employer. It appears that the $100,000 limit also takes into account any IRAs from which a CRD is taken.
- CRDs receive special tax treatment. If some or all of the CRDs are “repaid” through contributions to an eligible plan within 3 years of when they were taken, the re-contributed amounts will be treated as though they were part of a tax-free rollover. In other words, recipients can replenish their retirement savings within 3 years without regard to the otherwise applicable plan contribution limits. Furthermore, unless recipients electout, their CRDs will be taxed as though they were received over a 3-year period and will not be subject to the normally imposed 20 percent withholding rules. Finally, like the unforeseeable emergency withdrawals we previously described, CRDs are not subject to the 10 percent early distribution penalty.
- Presumably, clarifying guidance will be issued shortly. All affected plans will have to be amended eventually to provide for, and comply with, the new rules. However, public agencies are given until the plan year beginning in 2024 to amend their plan documents to retroactively reflect these rules.
While public employers should immediately familiarize themselves with the details of the new CRD rules, they should only make actual CRDs once they have consulted with their advisors and consultants, and feel confident about what they are doing. The CRD rules under the CARES Act are a special exception to the normal plan rules restricting distributions. Violation of the new CRD rules could adversely your plan’s tax status.
Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at email@example.com or (916) 329-3685.