CVS Prescribes Changes for Hardship Distribution Rules

January 14, 2019

The Honorable Charles P. Rettig
Commissioner
Internal Revenue Service
1111 Constitution Avenue, NW
Washington DC 20224

RE: REG-107813-18

Hardship Distributions of Elective Contributions, Qualified Matching Contributions, Qualified Nonelective Contributions, and Earnings

Dear Commissioner Rettig:

CVS Health appreciates the opportunity to comment on the Notice of Proposed Rulemaking (“Proposed Rule”) regarding “Hardship Distributions of Elective Contributions, Qualified Matching Contributions, Qualified Nonelective Contributions, and Earnings” issued by the U.S. Department of Treasury, Internal Revenue Service (“IRS”). CVS Health is the nation's premier health innovation company helping people on their path to better health. We have more than 290,000 employees throughout all fifty states and the District of Columbia.

CVS Health is submitting these comments based on our extensive experience as a sponsor of qualified retirement plans subject to the Employee Retirement Income Security Act (ERISA). The qualified plans that CVS Health maintains allow for hardship distributions. At least one plan also provides employer stock as an employee stock ownership plan (ESOP) investment.As part of the ESOP investment in employer stock, participants can elect to have dividends paid on ESOP holdings reinvested or have such dividends pass through to cash dividend payments.

Our comments in this letter focus on the current requirement under hardship rules, which would be extended under the proposed rule, whereby in order to satisfy the “no alternative means reasonably available” requirement to receive a hardship, a participant must have “obtained all other currently available distributions (including distributions of ESOP dividends under section 404(k)”.¹ § 1.401(k)–1(d)(3)(iv)(E). Specifically, as continued to be proposed under the regulations, the proposed §1.401(k)-1(3)(iii)(B) reads:

“(B) No alternative means reasonably available. A (hardship) distribution is not treated as necessary to satisfy an immediate and heavy financial need of an employee unless the employee has obtained all other currently available distributions (including distributions of ESOP dividends under section 404(k),² but not hardship distributions) under the plan and all other plans of deferred compensation, whether qualified or nonqualified, maintained by the employer. In addition, for a distribution that is made on or after January 1, 2020, the employee must represent (in writing, by an electronic medium, or in such other form as may be prescribed by the Commissioner) that he or she has insufficient cash or other liquid assets to satisfy the need. The plan administrator may rely on the employee's representation unless the plan administrator has actual knowledge to the contrary.”

The requirement that participants receive distribution of ESOP dividends is a burdensome obligation that, in CVS Health's experience, does not generate enough cash to alleviate the financial hardship being experienced by the participant. In fact, in most cases, cumulative yearly dividends are less than required minimums for hardships. The continuation of this requirement would require plans to check the dividend election status of participants and, if set to reinvest, modify the election to cash, prior to issuing a hardship. The end result is that affected participants then begin to receive small dollar dividend checks that go largely uncashed. In looking at our specific plan history, from 2010 to 2018, 85.9% of stale dated checks tracked are the result of pass-through dividend checks of less than $25.00.

For a plan of our size, with an average of over 150 hardship requests a month, and over 700 dividend pass-through elections a quarter, the continuation of the requirement that distributions of dividends under section 404(k) be made available to satisfy the current availability requirement is unnecessarily burdensome and does not alleviate the need underlying our participants' hardship distribution requests. We believe that continuing the requirement that participants must take the dividend pass-through in order to receive a hardship is detrimental to the longer-term financial security of our participants, by removing otherwise reinvested dividends from the participants' accounts, and depriving them of the long-term tax benefits and retirement savings growth that would help them achieve a more secure financial future.

Recommendations

CVS Health respectfully recommends that the requirement in the proposed regulation that the employee has obtained “all other currently available distributions” for purposes of meeting the “no alternative means reasonably available” condition be expressly interpreted to exclude distributions of dividends, including “distributions of ESOP dividends under section 404(k)”.

CVS Health also respectfully requests that the IRS consider providing plan sponsors with the ability to impose a minimum dollar threshold for payment of dividend pass-through checks to participants. Such a minimum dollar threshold would help plan sponsors reduce the number of small dollar uncashed checks, which would benefit participants by alleviating added participant expense while having no negative impact on participants. Participants would still retain the option of electing to receive dividends in the form of dividend re-investment or pass-through to cash. However, if a pass-through is elected, the dividend check would only be cut if the total amount exceeds the minimum dollar threshold (e.g., $25.00). In this scenario, if the total dividend was under the minimum dollar threshold, the dividend would be re-invested into stock.

CVS Health appreciates your consideration of our comment. We are available to discuss this comment with you if you have any questions. Inquiries or questions should be directed to donald.dempsey@cvshealth.com or by phone at 202-772-3534.

Sincerely,

Don Dempsey
Vice President, Regulatory Affairs
CVS Health
Washington, DC