Carlton Fields tax attorney Lowell Walters discusses an important issue employers with money purchase pension plans or governmental 401(a) plans should consider before allowing coronavirus-related retirement plan distributions.

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Coronavirus-Related retirement plan Distributions, MPPPs, and Governmental 401(a) Plans

The coronavirus (COVID-19) pandemic has had a significant impact on the global economy and people’s personal finances. Many individuals have experienced job losses, salary reductions, and overall financial strain during these challenging times. In response to these difficulties, the U.S. government has implemented several relief measures, including provisions for retirement plan distributions, Multiple Employer Plans (MEPs), and Governmental 401(a) Plans.

One of the relief measures in place is the Coronavirus-Related Distributions (CRD) option for retirement plans. The CRD allows eligible individuals to withdraw up to $100,000 from their retirement accounts, such as 401(k)s or IRAs, without facing the usual early withdrawal penalties. These penalties usually apply to individuals under 59½ years old who withdraw funds from their retirement accounts. However, the CRD provides some much-needed flexibility by waiving these penalties.

To qualify for a CRD, individuals must meet certain criteria. These include being diagnosed with COVID-19, having a spouse or dependent diagnosed with the virus, or experiencing adverse financial consequences due to the pandemic, such as job loss or reduced work hours. It is important to note that while these distributions are penalty-free, they are still subject to ordinary income taxes. However, individuals can choose to pay the taxes owed over a three-year period, reducing the immediate financial impact.

Another important aspect of retirement plans during the pandemic is the introduction of Multiple Employer Plans (MEPs). MEPs allow unrelated employers to join together and pool their retirement plans, providing cost savings and administrative ease. This initiative aims to make it easier for small businesses to offer retirement plans to their employees, which can be especially crucial during these uncertain times.

MEPs allow small businesses to effectively outsource the administration of their retirement plans to a single entity, resulting in reduced administrative overhead and potential cost savings. This can be a significant relief for small business owners who are already struggling to adapt to the economic challenges posed by the pandemic. By pooling resources and sharing costs, MEPs create a more efficient and cost-effective solution for these businesses.

Lastly, governmental 401(a) plans have been given temporary relief measures to address the financial hardships caused by the pandemic. These plans, typically used by government employees, now allow participants to take early withdrawals without facing the usual 10% early withdrawal penalty. Additionally, participants can repay these withdrawals over a three-year period, helping to mitigate the immediate financial burden.

Governmental 401(a) plans also provide flexibility in terms of loan availability and repayments. The limits for plan loans have been increased, allowing participants to borrow up to $100,000 or 100% of their vested account balance, whichever is less. These temporary changes provide government employees with additional options to manage their finances during these difficult times.

In conclusion, the COVID-19 pandemic has resulted in significant financial challenges for many individuals and businesses. However, the U.S. government has implemented several relief measures to support retirement plan participants and employers. The Coronavirus-Related Distributions (CRD), Multiple Employer Plans (MEPs), and temporary relief for Governmental 401(a) plans all aim to provide individuals with greater flexibility and financial relief during these uncertain times. It is essential to consult with financial professionals and advisors to assess the best course of action based on individual circumstances.