Understanding the Coronavirus-Related Distribution (CRD)

The CARES Act, which was recently passed into law includes changes for retirement plans including a new hardship category - the Coronavirus-Related Distribution (CRD) - as an option for employers to offer in their retirement plan. 

This blog will tackle 3 topics:

  1. Overview of the CRD
  2. Mechanics of implementing the CRD
  3. Should you allow for CRD in your organization’s plan?

CARE for COVID-19 (2)

  1. Overview of the Coronavirus Related Distribution (CRD)

The CARES Act gives employers the option to offer a new type of hardship withdrawal which waives the 10% penalty on early withdrawals of up to $100,000 from a qualified retirement plan or IRA for an individual who self-certifies that they:

  • were diagnosed with COVID-19, or their spouse or dependent was diagnosed with COVID-19; 
  • experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, work hours reduced, or were unable to work due to lack of child care due to COVID-19.

The legislation permits those individuals to pay tax on the income from the distribution over a three-year period and also allows individuals to repay the withdrawal to their account over the next three years.

 

  1. Mechanics of implementing the CRD

This is evolving as we write, and record-keepers are developing their plans to roll this out – we expect to hear from record-keepers in the coming days.   Typically an amendment to a plan document is required, but we are hearing that the amendment can be put into place retroactively.   Some record-keepers plan to make the CRD’s available based on negative-consent, i.e. if you do not object they will allow it.

If you elect to offer CRD and authorize the plan amendment, then your record-keeper will need to adjust their system to allow for this type of hardship withdrawal.  Record-keepers are working to program their systems to allow for CRD’s, but even small changes take time with complex proprietary technologies.  Keep in mind that the CARES act was signed late afternoon on March 28th.    

 

  1. Should you allow for CRD in your organization’s plan?

One of the Federal Government’s central goals in allowing people to access their retirement savings is to put money in people’s pockets to keep the economy afloat, but it comes at the cost of employee’s long-term retirement prospects. 

You don’t want employees to raid their 401(k) needlessly, especially when markets are down, but at the same time – you want to throw them a life-saver if they are truly drowning.  What factors should employers consider when deciding whether to allow it?

Need - have you furloughed or laid-off employees?  
If not, then they might not need emergency access to their retirement savings and may be better off keeping the money for retirement.   If you need to adjust staffing in the future, you can always amend your plan at that time to allow for it.

Culture - what kind of employer are we?    
Do you want to trust employees to make the right decisions for themselves, or try to protect their retirement savings from their own short-term impulses.  Some employers take a laissez-faire approach of saying, “if the government allows for it, I don’t want to stand in the way of employees accessing their own money.”    Other employers say –  “I want to help employees make the right decision for their futures.”  

Timing – will it help when they need it?  
If you have suspended or terminated employees, they likely need money now, not a month from now when they should be receiving generous unemployment benefits and CARES Act Checks.  Keep in mind that the Federal Government is aiming to send a $1,200 check to every adult in America (who meets means testing) and an additional $500 for every child in the household by April 16th.  The CARES Act also includes extended unemployment benefits and adds an additional unemployment payment of $600 per week. 

The CRD could act as a helpful bridge between losing your job and when CARES Act and unemployment checks arrive, but as discussed in section 2 above, it will likely take at least until April 16th before plans can be amended and record-keepers are able to accommodate CRD’s. 

How will employees perceive it if we don’t give them access to the funds?

Maybe this is the toughest question of all, and it ties back into the culture of the organization. Most of your employees will hear about the CRD provisions in the CARES act and you need to weigh doing the right thing for them vs. giving them what many might want, and what a few will truly need.

Please reach out to a trusted advisor and/or your record-keeper to best understand what decision is right for you and your employees. 

Conor Weir on April 2nd, 2020

Posted by Conor Weir

Conor Weir is a Managing Director at Retirement Benefits Group where he consults on retirement plans with the goal to maximize the benefit to business owners and their employees. In his role, Conor is responsible for retirement plan design, fiduciary risk management, non-qualified plan design, and business succession planning.

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