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Coronavirus Distributions and DB Plans

Practice Management
The recently enacted CARES Act has a variety of effects on retirement plans, and not just 401(k)s. A recent blog entry discusses some of its effects on defined benefit plans—including how it affects distributions.
 
In “Implementing a Coronavirus Distribution Program in Your DB Plan,” October Three discusses distributions that can be made from DB plans under the CARES Act.

DB Plan Distributions
 
A Coronavirus-related distribution regarding a DB plan is the same as one made involving a defined contribution plan: it is any distribution from a tax-qualified retirement plan made on or after Jan. 1, 2020, and before Dec.31, 2020, to an individual diagnosed with a disease designated as coronavirus by a test approved by the Centers for Disease Control and Prevention or with a spouse or dependent with such a diagnosis. It also is a distribution to an individual who experiences adverse financial consequences due to:
 
  • quarantine;
  • furlough;
  • layoff;
  • reduced work hours; and
  • inability to work due to lack of child care.
It also includes a distribution as a result on and individual closing their business or reducing its hours of operation, or due to additional factors the Secretary of the Treasury determines.
 
Distributions and the CARES Act
 
When a distribution may be made to a DB participant has not changed, but under the CARES Act lump sum distributions may be made to terminated vested participants, with the consent of the participant and spouse when applicable, when the present value of the benefit exceeds $5,000. The matter is more complicated, however, regarding distributions to participants who have been furloughed and not permanently separated from service, October Three notes.
 
For those who take lump sum distributions that are related to the Coronavirus, the CARES Act provides the 10% early withdrawal tax does not apply. In addition, the distributions may be included in taxable income ratably and rolled over during a three-year period.
 
Coronavirus-related DB distributions have an effect on plan sponsors as well, October Three writes. For instance, like any de-risking and lump sum payments to terminated vested participants, those related to the effects of the pandemic will reduce the amount of Pension Benefit Guaranty Corporation premiums. They note, however, that partial withdrawals can present complications for a plan. 
 
Meeting Needs
 
October Three suggests that participants may seek a distribution from a DB account at this time for a variety of reasons, including:
* adverse financial circumstances because of the pandemic;
* one-time relief from taxes on distributions; and
* advantages to DB plan distributions that outweigh those of 401(k) distributions.
 
October Three suggests that this—helping participants meet immediate financial stress—is “probably the most important reason” a plan sponsor may consider allowing participants to take a distribution from DB plans.