Once upon a time there was vanilla, chocolate, and maybe strawberry ice cream. As a kid growing up, we had a choice of the above flavors or sometimes vanilla fudge. As we all know now there are almost as many different flavor/topping combinations as people anymore! In addition to the hundreds of different sweet flavors, there is even a local ice cream shop that serves savory flavors like corn, avocado, and jalapeno!
So too, we have many choices when it comes to COVID related distributions. You as the plan sponsor may have decided against adopting any of the COVID-related distribution relief under the CARES Act – and that is your choice. But it does not mean that the distribution you recently processed for a current or former participant, who is a Qualified Individual (“QI”), (and withheld 20% tax) is necessarily how the participant will choose to declare on their own personal tax form. Regardless of the decision you made on a plan level, the law will allow a participant to claim COVID relief. Which means they can be exempt from the 10% penalty tax, be eligible to spread the tax owed over three years and be able to roll over that amount (even for an RMD or a hardship withdrawal).
And what if you as a plan sponsor decided against extending loan payments/suspensions? Well, a QI participant has choices there too. If a participant loan is forced to offset due to non-payment, and is issued a 1099 for 2019, they would generally, be responsible to pay any tax due and the 10% penalty if applicable. As a result of the CARES Act, those same deemed taxable loan distributions are also covered, and can be treated by the QI participant as a COVID Related Distribution (CRD). The same waiver of the 10% penalty and the ability to pay the tax owed over three years applies.
Remember, a participant who chooses to declare that the funds they received fall under the CARES Act is certifying on their own that they were affected by COVID-19 and are eligible for this relief as a ‘qualified individual.’
Looks like with plan distributions, as well as ice cream, we have lots of choices too – some sweet, some savory! Got a question about your plan participants and what flavor distributions they are looking for in your plan? Call us – we can help!