Permalink Submitted by Alan - IRA critic on Fri, 2020-04-17 23:50
You can’t qualify until a test is failed or adverse financial consequences incurred. These situations probably first became possible in March sometime, but no matter when they occurred up to 12/30/2020, distributions taken back to 1/1 will qualify. Since the last distributions must be taken by 12/30, that is the last date that a person could become qualified for the distributions. There are several issues the IRS is going to have to release guidance on.
Permalink Submitted by brcwm on Mon, 2020-04-27 15:54
Alan, if someone met the qualifying individual factors, from what I have read, they can take all the way up to $100,000 out of a 401k. Then, just roll the funds over to an IRA using the 60-day rule. This would get the funds out of the 401k control, and into their control. Is this an unintended consequence of the CRDs? Thanks.
Permalink Submitted by Alan - IRA critic on Mon, 2020-04-27 16:17
Yes, if they qualify for a CRD AND if the 401k plan permits CRD distributions, the vested plan benefit up to 100k can be distributed without withholding if a W -4P is filed declining withholding. The participant then has up to 3 years to “re pay” the distribution to any eligible retirement plan. Of course, the repayment can be done right away if desired. These are not typical rollovers because there is no 60 day deadline and the receiving IRA will report them in Box 14a and 14b of Form 5498 as repayments.
These provisions have been around since 2005 with the Hurricane Katrina natural disaster distributions, and also with the 2016 and 2017 Hurricane disaster distributions, so this result is not unintended. However, plans with high fees or poor investment options will lose assets which they did not intend to lose until participant separation. This also will skew plan accounting for balances of elective deferrals, employee contributions and earnings. As such there will be plans that do not offer CRDs.
There has been some very mixed messages regarding Roth conversions of CRDs. Some consultants indicate this is allowed, and some don’t. The IRS is going to have to clarify this along with many other related questions.
Permalink Submitted by brcwm on Mon, 2020-04-27 17:53
From my reading, the rules regarding eligibility are really loose. For example, if I (dual income family) took a day off to help with kids while my wife worked, then I would fall under the being unable to work due to lack of child care. The “adverse financial consequences due to being quarantined” is even looser. Who even has the time to audit this?
Permalink Submitted by Alan - IRA critic on Mon, 2020-04-27 18:18
Yes, “adverse financial circumstances” is going to require extensive IRS guidance, and most consultants expect this to only broaden the qualifications, perhaps even to the point of allowing everyone to qualify for a CRD. This will be administered mostly on the honor system with custodians that offer CRDs being able to accept the word of the participant. Since a CRD includes all distributions back to 1/1 for anyone that qualifies up to 12/30, there is plenty of time for the IRS to release the guidelines. That said, if they shock everyone with restrictive documentation requirements for certain situations, it would be very costly to have already taken a distribution that does not qualify and end up with a 60 day expired rollover deadline.
Permalink Submitted by William Tuttle on Mon, 2020-04-27 18:19
There is nothing inherent in the legislation that is “loose”. The are precise statements. what remains to be seen if what guidance the IRS comes out with. Your example is quire a stretch I wouldn’t be taking at the current time. The adverse financial consequences are quire narrowly tailored and as written only apply the individual taking the distribution and not the spouse or family as a whole.
Doing the right thing is never about the likelihood of getting caught.
Permalink Submitted by Alan - IRA critic on Fri, 2020-04-17 23:50
You can’t qualify until a test is failed or adverse financial consequences incurred. These situations probably first became possible in March sometime, but no matter when they occurred up to 12/30/2020, distributions taken back to 1/1 will qualify. Since the last distributions must be taken by 12/30, that is the last date that a person could become qualified for the distributions. There are several issues the IRS is going to have to release guidance on.
Permalink Submitted by brcwm on Mon, 2020-04-27 15:54
Alan, if someone met the qualifying individual factors, from what I have read, they can take all the way up to $100,000 out of a 401k. Then, just roll the funds over to an IRA using the 60-day rule. This would get the funds out of the 401k control, and into their control. Is this an unintended consequence of the CRDs? Thanks.
Permalink Submitted by Alan - IRA critic on Mon, 2020-04-27 16:17
Permalink Submitted by brcwm on Mon, 2020-04-27 17:53
From my reading, the rules regarding eligibility are really loose. For example, if I (dual income family) took a day off to help with kids while my wife worked, then I would fall under the being unable to work due to lack of child care. The “adverse financial consequences due to being quarantined” is even looser. Who even has the time to audit this?
Permalink Submitted by Alan - IRA critic on Mon, 2020-04-27 18:18
Yes, “adverse financial circumstances” is going to require extensive IRS guidance, and most consultants expect this to only broaden the qualifications, perhaps even to the point of allowing everyone to qualify for a CRD. This will be administered mostly on the honor system with custodians that offer CRDs being able to accept the word of the participant. Since a CRD includes all distributions back to 1/1 for anyone that qualifies up to 12/30, there is plenty of time for the IRS to release the guidelines. That said, if they shock everyone with restrictive documentation requirements for certain situations, it would be very costly to have already taken a distribution that does not qualify and end up with a 60 day expired rollover deadline.
Permalink Submitted by William Tuttle on Mon, 2020-04-27 18:19