The $100,000 limit on coronavirus‑related distributions (CVRD) under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is both an individual limit and a plan limit. Tracking and enforcing the $100,000 limit has the potential to create special compliance issues for employers and controlled group affiliates that sponsor more than one retirement plan and have individuals with an account balance under more than one of those plans.
Under the CARES Act, an eligible individual—that is, an individual who satisfies the requirements to be eligible to take a CVRD (discussed in in more detail in our prior blog post)—may take CVRDs during calendar year 2020 of up to $100,000. This individual limit applies in the aggregate to all CVRDs from the individual’s IRAs and employer‑sponsored retirement plans.
While individuals must keep track of all of their CVRDs against the individual limit, the CARES Act also requires enforcement of the $100,000 limit on both a plan and controlled group basis. That is, in order for a retirement plan distribution to be treated as a CVRD, the plan administrator must ensure that no more than $100,000 in CVRDs in the aggregate are distributed to an eligible individual from its retirement plan and all retirement plans sponsored by affiliated companies in its ERISA controlled group. There is no clear or easy way to manage this requirement. The CARES Act does not allow plans to simply rely on participant representation that the CVRD requested would not exceed the $100,000 controlled‑group cap.
The consequences of exceeding the cap are twofold. First, the tax-qualified status of the plan could be jeopardized if an amount in excess of the $100,000 limit is distributed to a participant who is not otherwise eligible to receive the distribution but for the distribution being a CVRD. Moreover, even if the participant is otherwise eligible to receive the distribution, the initial treatment of the distribution as a CVRD might have caused the plan to fail to satisfy the direct rollover opportunity and special tax notice requirements of Code Sections 401(a)(31) and 402(f). Second, the tax withholding and reporting would potentially be incorrect, as the excess distribution over $100,000 might otherwise be subject to the 10% early distribution penalty and the 20% mandatory withholding on eligible rollover distributions.
It is possible that the IRS may issue guidance that would allow plan administrators to rely on participant representation that the requested distribution would not exceed the $100,000 plan and controlled‑group limit. In the absence of such guidance, what are plan administrators to do? First, plan administrators, on their own or together with their third-party administrators, should identify the plans under which CVRDs are permitted and establish a centralized process for tracking CVRDs from these plans. Ideally, this process should provide accurate prospective data before a CVRD is made. Then, if a CVRD will cause the $100,000 to be exceeded, the plan administrator will have the opportunity to intervene and prevent the distribution. If this is not feasible, plan administrators may want to consider auditing CVRDs to determine compliance with the $100,000 controlled‑group cap and, if applicable, self-correct any excess distributions. Under the IRS’s Employee Plans Compliance Resolution System (EPCRS), a plan may self‑correct an overpayment by requesting the amount with earnings to be repaid to the plan and notifying the participant that the excess distribution is not eligible for rollover treatment.
Additional guidance from the IRS concerning CVRDs is almost certainly forthcoming, but whether it will address the administration of the $100,000 plan and controlled‑group limit is far from certain. In the meantime, plan administrators will be well-served to consider how they might enforce the limit.