If you’ve been wondering why I haven’t posted about the effects of COVID-19 on employee benefits it’s because I’ve been practicing social network distancing. Just kidding. While we await Congress to pass and the President to sign the 2 trillion dollar stimulus package known as the CARES Act, I thought I would point out how 401(k) or 403(b) plans that permit hardship withdrawals under the federal disaster safe harbor can now permit such withdrawals for employees suffering a financial hardship as a result of COVID-19.
While the President declared the COVID-19 Pandemic a national emergency on March 13, it is not a declared national disaster yet. However, the President declared California, Washington, and New York as major disaster areas on March 22. Subsequently, the states of Iowa, Louisiana, Texas, Florida, North Carolina and New Jersey have been declared disaster areas and more states are likely to be so declared. These declarations qualify residents of these states and employees of employers in those states to qualify for a hardship distribution for losses as a result of the virus, if the plan has adopted the federal disaster safe harbor.
If a plan uses the facts and circumstances test instead of the safe harbor, withdrawals for substantiated financial hardships resulting from COVID-19 are subject to the plan administrators approval, but should be approved.
However, such hardship withdrawals cause leakage in retirement savings as they cannot be re-contributed to the plan. Additionally, the withdrawals are subject to income tax and the 10% early withdrawal penalty if the participant is under age 59 1/2. The CARES Act proposal permits plans to allow for COVID-19 related distributions of up to $100,000. Such withdrawals are not subject to the 10% penalty and the income tax consequences can be spread over 3 years. Most importantly, the withdrawals can be re-paid to the plan over 3 years and can even be made to another employer’s plan that permits roll overs should the employee change jobs. A plan would have to be amended to permit such distributions. Given the advantages of the CARES Act, it may be well worth it to wait for it to become law which should be any day now.
Stay well.