The Internal Revenue Service recently issued questions and answers regarding the special distribution, rollover and loan provisions for tax-qualified retirement plans under the Coronavirus Aid, Relief and Economic Security Act.
The Internal Revenue Service (IRS) issued a first round of answers to frequently asked questions (FAQs) regarding the special coronavirus-related distribution, rollover and loan provisions for tax-qualified retirement plans under the Coronavirus Aid, Relief and Economic Security (CARES) Act.
The CARES Act provides that an eligible retirement plan (such as a 401(k) plan, a 403(b) plan or an IRA) may allow a qualified individual to take a coronavirus-related distribution of up to $100,000, taxable ratably over three years unless repaid within three years after the distribution was received. The CARES Act also allows an eligible retirement plan to increase the loan limit for a qualified individual, up to the lesser of $100,000 (minus outstanding plan loans of the individual), or 100% of the individual’s vested benefit under the plan. The CARES Act permits a plan to provide qualified individuals with up to an additional year to repay plan loans.
A retirement plan participant is a “qualified individual“ if:
The participant, or his or her spouse or dependent, is diagnosed with the virus SARS CoV‑2 or with COVID-19 (diagnosed by a test approved by the Centers for Disease Control and Prevention), or
The participant experiences “adverse financial consequences“ due to (1) being quarantined, laid off or furloughed, or having work hours reduced due to SARS CoV‑2 or COVID-19; (2) being unable to work because of lack of child care due to SARS CoV‑2 or COVID-19; (3) the closing or reduced hours of a business that the participant owns or operates due to SARS CoV‑2 or COVID-19; or (4) other factors identified by the US Department of the Treasury and the IRS.
The FAQs confirm that the Treasury Department and the IRS are working on additional guidance to address the CARES Act provisions for retirement plans and IRAs. The Treasury Department and the IRS anticipate that the guidance will apply the principles of IRS Notice 2005-92 related to the Katrina Emergency Tax Relief Act of 2005 (KETRA) where applicable. For now, the KETRA guidance provides a roadmap for plan sponsors as they begin to address the tax and reporting issues related to the CARES Act provisions.
The FAQs include the following information:
The CARES Act provisions for coronavirus-related distributions and loans are optional for plan sponsors to adopt.
An eligible distribution made to a qualified individual on or before December 30, 2020, can be treated as a coronavirus-related distribution for tax purposes, regardless of whether the plan offers such distributions. For example, if a qualified individual takes an in-service withdrawal between January 1, 2020, and December 30, 2020, from a 401(k) plan that does not offer coronavirus-related distributions, the participant may report the withdrawal as a coronavirus-related distribution on his or her tax return, subject to the limits on such distributions.
The Treasury Department and the IRS are reviewing public comments and considering whether to expand the list of factors to determine whether a person is a “qualified individual.“
For loans to qualified individuals that are outstanding between March 27, 2020, and December 31, 2020, any repayment may be delayed by up to one year. Repayments must be amortized to reflect the delay and accrued interest during the delay.
The CARES Act does not change the rules for permitted distributions under pension plans, including the qualified joint and survivor annuity requirements.
A plan that does not otherwise accept rollover contributions is not required to accept repayments of coronavirus-related distributions.
Plan administrators must report a participant’s coronavirus-related distribution on Form 1099-R even if the participant repays the distribution in the same year.
For retirement plans that offer coronavirus-related relief under the CARES Act, plan sponsors and administrators should consider the FAQs in administering the CARES Act provisions, and can obtain more information on the FAQs from their McDermott employee benefits lawyer or one of the listed authors.