One of the most popular articles published by PLANADVISER Magazine last year – entitled “Warn your customers: don’t abuse coronavirus hardship cases”- went live in early June.

As readers will likely recall, an important provision of the Coronavirus Aid, Aid, and Economic Security Act (CARES) created a window in which pandemic-impacted retirement plan participants were free of up to $ 100,000 from their taxation Withdrawal qualifying accounts have the option to either split the declared income over a three-year period for taxes or repay the funds later to avoid taxation altogether. The June article pointed out how Plan participants can easily attest to themselves that they have experienced pandemic hardship that qualified them for such a distribution – and how this may be a fiduciary risk for Plan sponsors and even the possibility of one Tax fraud can generate on the part of ignorant or dishonest participants.

Robert Lawton, President of Lawton Retirement Plan Consultants, was among the experts cited in the article. Speaking to PLANADIVSER again this week, he didn’t seem surprised to learn about the success of the article, given the many questions and comments he continues to hear from his customers about coronavirus-related distributions, or “CRDs”.

PLAN ADVISER: They raised some concerns last year when the CRD framework was first established that plan sponsors might feel compelled to allow such distributions from their plans even in cases where they believed their plan population did not had serious financial consequences that would justify withdrawing money from the retirement plan. In your experience, has this happened very often?

Lawton: I was surprised how that played out with my customers. Most of the plan sponsors I work with from smaller companies have chosen not to adopt the more liberal withdrawal rules, while all of larger companies with thousands of employees did.

In all cases, I had discussions with them about the potential benefits and negative consequences. Nobody really knew exactly what the future would look like immediately after the CARES bill was passed, so many customers chose to be safe and adopt the more liberal resignation policy immediately. Others realized that they could enact provisions of the CARES Act at a later date if the situation warranted and decided to wait.

As it turned out, there were many companies and industries that were not at all affected by the events of 2020. Some of my clients even reported that 2020 was the best year ever. Other companies and industries have of course been hit pretty hard. Those companies that have been badly affected and where you may have thought withdrawals were the highest have very few. The main reason was that these companies were ultimately laid off, allowing them to make total distributions from their 401 (k) accounts instead of withdrawals.

PLAN ADVISER: What do you think of the total volume of withdrawal activity we saw in 2020 and early 2021? In the end, the volume wasn’t as bad as some feared, but the old-age insurance has certainly been damaged, right?

Lawton: My larger clients, all of whom were implementing the more liberal payout guidelines, were split up by volume. Some saw very little change in the number of withdrawals made, while others saw an extraordinary number of withdrawals – up to ten times before COVID-19.

As it turned out, 2020 was a bad year for withdrawing money from any investment. The US and overseas stock markets rose sharply over the year, meaning those who withdrew early missed many gains.

In my view, anyone is unlikely to pay the amounts they withdrew. The money was probably spent. Those who made withdrawals suffered a double hit in 2020. They permanently withdrew some (or all) of their retirement assets and missed out on some very good returns on those assets.

PLAN ADVISER: Have you seen any evidence that plan participants who have taken CRDs are seriously considering how this could affect their taxes in 2021 or years to come?

Lawton: No None. I’m afraid there will be some people who will have negative surprises when they fill out their tax returns. For the average person, the tax treatment of these withdrawals may seem very favorable at first glance. There is no 10% penalty tax and no 20% withholding tax liability, and the tax liability can be spread over three years. And again, there is the option to pay back what you withdrew and get a refund of the taxes paid.

If attendees had had a conversation with a tax professional before a withdrawal, they might have got the impression that taxes are not a cause for concern. This could have implied for many people that they would not have to pay tax on these withdrawals, which is not true.

PLAN ADVISER: Have you seen any signs that plan sponsors and / or note takers are creating the infrastructure that will allow people to return CRD funds to their qualifying accounts to avoid income taxation?

Lawton: No I don’t think anyone thinks that most people will pay back these withdrawals.

PLAN ADVISER: You mentioned last year that participants who try to avoid bankruptcy by making COVID-19 withdrawals and end up ending up Register for bankruptcy anyway, they didn’t have to lose their retirement benefits. Can you explain again what you meant by saying that funds held in qualifying pension plans are not subject to bankruptcy proceedings? Should this be part of the messages sent by plan sponsors or advisors to attendees as the pandemic drags on?

Lawton: This is an important point that all participants in the retirement plan should consider. If you have money on a qualifying retirement plan (such as a 401 (k) plan) and you feel like you may file for bankruptcy, please do not back off your debt repayment plan in order to become bankrupt avoid.

You can encourage bill collectors to do so. However, your qualified pension assets are not subject to attachment by the creditors in insolvency proceedings. In other words, your 401 (k) balance cannot be stolen from you if you file for bankruptcy.

It would be great if all of the Plan Sponsors could discuss this point during their staff training sessions. I think it’s also important that every employee who applies for hardship cover receives an automatic referral to the EAP or the company’s employee assistance program for financial advice. The consultation should be completed before the withdrawal is approved and processed.

Many employees lose everything in bankruptcy because they are unaware of the protection they are receiving. If they receive financial advice as early as possible, they can not only get back on their feet faster, but also maintain their self-esteem. Applying for hardship is one of the early warning indicators of financial difficulties.

PLAN ADVISER: What are your general thoughts on how the industry has dealt with the COVID-19 pandemic? Have sponsors and attendees received the advice and guidance they need? In your opinion, where were some of the pain points and what went well?

Lawton: I think the federal government responded admirably to the COVID-19 crisis by giving employees flexibility in terms of their retirement provision in a very timely manner. This is unusual in that the federal government can be a stumbling block.

I have observed that plan sponsors respond appropriately to their corporate culture by using the provisions of the CARES Act that work best in their community. I haven’t seen employers struggling with the benefits impact of the COVID-19 crisis as much as they have with staffing and quarantine issues.

In my view, the federal government has done an excellent job of providing employers with the flexibility they need when it comes to retirement benefits in times of crisis, and employers have done an excellent job taking advantage of what works best in their company.