Reviewing Your Qualified Employee Retirement Plans Post Covid-19 – Part Two
May 21, 2020
With so many aspects of business changing due to the ongoing health crisis, employees and their employers are facing a multitude of financial hardships that will undoubtedly have a significant impact upon such benefits as qualified retirement plans.
If you’re an employer and are uncertain about the effect the pandemic might have upon the retirement benefits currently being offered to your workforce, here is a continuation of the list of provisions, that may be applicable to you:
Extended repayment rights on distributions:
With the Cares Act extending the usual 60 days period in which taxpayers are not taxed on the repaid amounts for employer plan distributions, taxpayers receiving distributions related to Covid-19 will now have 3 years to do so before they incur taxes.
Adopting a facts-and-circumstances standard to determine an employee’s hardship:
If a benefits plan allows for hardship withdrawals, it usually adopts the IRS safe harbour rules for what is deemed to be an immediate financial need, and some safe harbour events that might be relevant during the pandemic include distributions to make rent or mortgage payments and some costs of tuition. Reviewing and amending plans as an employer, with respect to an employee’s level of hardship is permitted under IRS regulations.
The 20% withholding requirement will no longer apply to Covid-19 related distributions:
Usually, employer plans must withhold 20% of any distribution that hasn’t been rolled over directly to an IRA or any other qualified retirement plan. A provision within the CARES Act states that the mandatory 20% withholding requirement will no longer apply to a distribution directly related to the pandemic. This can be complex, though, so be sure to check with a tax, payroll or retirement professional for more detailed guidelines.
Relief for age 59 and a ½ distribution penalty:
Under normal circumstances, a 10% penalty is incurred on distributions from an employer plan if the individual hasn’t reached the age of 59 and a ½, but the CARES Act is now giving relief from this on up to $100,000 of distributions related to covid-19 that were received in a tax year.
Employer deadline extensions for CARES Act amendments:
For employers adopting any necessary CARES Act amendments, the deadline has been extended to the end of the first year beginning on or after the 1st of January 2022, as long as the lan complies with the rules in the interim.
The main advice from tax and benefits professionals during the Covid-19 pandemic, has been for employers to review and assess their qualified retirement plans as a matter of urgency, and to communicate with their employees wherever necessary.