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Use Care When Implementing CARES Act Retirement Plan Distributions – State Law and Benefit Offset Concerns

As we have previously reported on our blog here and here, the CARES Act provided relief to participants in retirement plans by allowing employers to amend their retirement plans to include certain coronavirus-related distributions and to permit increased loan amounts for certain qualified individuals. Many employers have agreed to adopt these changes, and under federal law, the treatment of these distributions is clear. But there are other issues that employers and employees should consider, including:

  • The coronavirus-related distributions could be subject to taxation under state law, even if the employee later repays the distribution to the plan; and
  • If employees are receiving unemployment and/or disability benefits, the coronavirus-related distributions may reduce or offset these benefits.

However, the enhanced loans would not be subject to taxation and may not offset unemployment and disability benefits, which may make the enhanced loan a better option for employees who anticipate paying back the distribution.

Employers should: (i) contact their retirement plan administrators to ensure the administrator is properly reporting any coronavirus-related distributions for state tax law purposes; (ii) carefully review communications being sent to participants relating to the enhanced loans and coronavirus-related distributions to make sure information regarding potential offsets of unemployment and disability benefits are mentioned; and (iii) review their disability policies to determine whether these distributions would offset any disability benefits being received by their employees.

The lawyers of our Employee Benefits and Executive Compensation Practice Group are readily able to assist companies on a nationwide basis with implementing sophisticated benefit plans and providing answers to their most challenging compensation issues. Additionally, our lawyers are well aware of the daily employee benefits challenges facing companies of all sizes and are capable of helping in-house lawyers and human resources personnel with the day-to-day advice and guidance necessary to properly administer employee benefits plans.

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