Since late March of 2020, CARES (Coronavirus Aid, Relief, and Economic Security) Act permits plan sponsors to allow retirement plan relief features into their plans. More specifically, employers can allow their qualified employees to take advantage of the coronavirus-related distributions (CRDs) feature and withdraw up to $100,000 without penalty, among other benefits.

In order to be eligible for CRDs, however, an employee has to be a “qualified individual,” meaning he or his spouse has to be impacted by COVID-19. And when an employee requests a CRD, you (the employer) are responsible for authorizing it.

Many employers are asking, “What’s our responsibility, if any, in this?” Or, “How do we mitigate our risks and ensure that our employees are indeed qualified individuals when they ask for a CRD?”

These are great questions. To find out, let’s dig a little deeper.

Coronavirus-related Distribution Benefits

As a friendly reminder, CRDs have some benefits typically not available for other distributions. CRDs are:

• Exempt from the 10% penalty tax;
• Eligible to be taxed ratably over three years; and
• Able to rollover the amount.

Plan Sponsor’s Responsibility

Recall that CRDs are optional, so you are not required to offer the option in your plan.

That said, if your plan does offer this feature and one of your employees does requests a CRD, you can take their words that they are qualified individual. Put another way, your HR department doesn’t have to investigate whether an employee satisfies the required conditions. We believe this is good news for employers (can you imagine trying to verify if an employee or their spouse have COVID-19?). Although your responsibility is limited, industry experts recommend getting something in writing.

Best Practice

Although you can rely on the employee’s self-certification for a CRD, keeping proof can pay dividend in the long run (think IRS or DOL audits). One way you can do that is having the employee sign a self-certification letter. Below is a sample for your use from National Plan Advisors Association:

Sample self-certification letter

Name: _______________________ (and other identifying information requested by the employer for administrative purposes). 

I certify that I meet at least one of the following conditions:

• I was diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (referred to collectively as COVID-19) by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act);
• my spouse or my dependent was diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or
• I have experienced adverse financial consequences because: (i) I, my spouse, or a member of my household was quarantined, furloughed or laid off, or had work hours reduced due to COVID-19; (ii) I, my spouse, or a member of my household was unable to work due to lack of childcare due to COVID-19; (iii) a business owned or operated by me, my spouse, or a member of my household closed or reduced hours due to COVID-19; or (iv) I, my spouse, or a member of my household had a reduction in pay (or self-employment income) due to COVID-19 or had a job offer rescinded or start date for a job delayed due to COVID-19. 

Employee Signature: ___________________                Dated: __________________

This sample certification can be used for the purposes of taking a CRDs and rolling back (re-contribution) a CRD. As to the last point, remember that the CARES Act allows an eligible employee to rollover a CRD taken within three years to avoid possible taxes.

Further, if you haven’t already you should consult with your service providers if your plan permits CRDs in order to acquaint yourself with the process. If you’re not sure of the process, be sure to ask your investment advisor or your retirement plan expert. They should help you navigate this with ease.

Final Words

Your plan is not required to allow for CRDs, but study has shown that most plans are adopting this feature. If your plan allows CRDs, feel free to use the above sample self-certification letter and modify it to your needs.

Updated guidance on CRDs can be found in IRS Notice 2020-50 here.

Have questions about how CRDs impact your plan? Need help? Give us a ring at 818-275-1556 or drop us an e-mail at mrahman@nesa401k.com. We will get back to you with lightning speed.

Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.