Retirement Plan Distributions during the Coronavirus
The coronavirus pandemic has already caused financial strain on Americans, and many are predicting this effect to continue. We have received questions from plan sponsors and have been contemplating how they should respond to plan participants when they request a withdrawal from their retirement account. Although options do exist, they are currently limited, and we are keeping an eye on the legal landscape for any changes.
This past Friday, the President declared a nationwide emergency and directed FEMA to address the COVID-19 threat pursuant to section 501(b) of the Stafford Act. This declaration does not provide any further opportunities for participants to withdrawal funds from retirement accounts despite recently enacted legislation and regulatory changes to the hardship rules.
The recently passed Further Consolidated Appropriations Act permitted qualified disaster distributions, which eliminated the 10% premature distribution penalty, but only applied to federally declared disasters under section 401 of the Stafford Act, and only applied to disasters declared before February 18, 2020. The President’s Friday declaration was not only under the wrong part of the Act to permit these qualified disaster distributions (declaration was for emergency relief under section 501 instead of disaster relief under section 401), but the declaration was also outside of the permitted time frame. Therefore, while we have seen some sources claiming a participant could take a withdrawal under this new law, it would not be permissible.
The hardship regulations were also amended in the second half of 2019 to expand distributions for certain disasters. Hardship distributions must be due to an “immediate and heavy financial need.” The regulations were amended so that, if a plan adopted the new safe harbor definition, distributions for expenses and losses (including loss of income) on account of a disaster declared by FEMA under the Stafford Act would be deemed to be due to an immediate and heavy financial need. But like the statutory qualified disaster relief, the President’s declaration of a nationwide emergency under section 501 of the Stafford Act is not a declaration of a disaster, and therefore the declaration does not permit a hardship distribution under the safe harbor definition.
We will continue to monitor the legal landscape and provide updates for any changes. The President has talked about declaring a nationwide disaster, but that has not yet occurred. Until that time, plans do have other options to consider. Participants are permitted to take plan loans if loans are permitted by the Plan, and plans without a loan option might want to consider amending their document to allow for loans. Also, plans that allow hardship distributions could be amended to go outside the safe harbor and allow a distribution for expenses and losses due to COVID-19. While such an amendment would put the hardship distribution outside of the safe harbor definition, given the emergency declaration, we do not believe it is likely that the IRS would object to a plan’s decision to deem these distributions to be due to an immediate and heavy financial need where a participant can otherwise show a hardship. Note that a hardship distribution to a participant under age 59 ½ is subject to a 10% premature distribution penalty.
If you have any questions regarding the distribution options you can provide to your plan’s participants, please contact a Graydon benefits attorney.