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Know When & How to Repay COVID-Distributions
Understanding the regulations of the CARES Act and CRDs is critical
In the wake of the unprecedented health crisis caused by COVID-19, the U.S. government swiftly enacted the Coronavirus Aid, Relief, and Economic Security Act on March 27, 2020. This monumental relief package, the largest in U.S. history, included several provisions that directly impacted retirement and health savings arrangements.
For sponsors and beneficiaries of Defined Benefit Plans, understanding these changes, especially regarding Coronavirus-Related Distributions (CRDs), is critical.
Understanding COVID-Related Distributions
CRDs are special distributions that allow eligible individuals to take up to $100,000 from their eligible retirement accounts, including Defined Benefit Plans, without the usual 10% early distribution penalty that typically applies to distributions made before the age of 59 ½.
Key features of CRDs include:
- • Tax Treatment: While these distributions are still subject to income tax, the tax burden can be spread over a three-year period, starting in 2020.
• Repayment: The CARES Act also allows individuals to repay the CRD amount within three years to a qualified retirement plan or IRA. If repaid within this timeframe, the distribution will be treated as a rollover, and no tax will be owed.
Guidance for DB Plan Sponsors
Amending Plan Documents: While not all retirement plans were required to adopt the CRD provisions, if you chose to do so, ensure that your plan documents are amended accordingly.
The IRS has provided a grace period for these amendments, but it’s essential to keep this on your radar.
Communication is Key: Regularly inform plan participants about the option to repay CRDs. Ensure that they understand the tax implications and the benefit of repaying within the three-year window.
Recordkeeping: Maintain meticulous records of all CRDs and any subsequent repayments. These records will be essential for both plan reporting and participant tax reporting.
Accepting Repayments: Ensure your plan is set up to accept CRD repayments. This may involve coordinating with your plan’s third-party administrator or custodian. Establish a clear process and ensure that repayments are correctly credited.
Stay Updated: The rules and regulations surrounding the CARES Act and CRDs can evolve. Keep abreast of any new guidance from the IRS or the Department of Labor to ensure continued compliance.
Seek Guidance from an Advisor
The CARES Act provided much-needed relief to millions of Americans, and as a Defined Benefit Plan sponsor, you play a crucial role in administering these provisions.
By understanding CRDs, keeping your participants informed, and ensuring your plan is compliant, you help in extending this relief to those impacted by the pandemic.
As always, consider seeking guidance from professionals or industry experts to navigate these provisions effectively. Schedule a meeting with one of our professionals today to learn more!