IRS Releases Coronavirus-Related Relief for Retirement Plans Q&A

On May 4, 2020, the Internal Revenue Service ("IRS") provided questions and answers regarding provisions of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. Specifically, the Q&A addresses Section 2202 of the CARES Act, which provides for coronavirus-related distributions and expanded permissible loans from eligible retirement plans.

As highlighted in our previous e-alerts, the CARES Act provides favorable tax treatment for up to $100,000 of coronavirus-related distributions from eligible employer retirement plans to qualified individuals and permits increased limits on the amount a qualified individual may borrow from an eligible retirement plan. The CARES Act also provides plan sponsors the discretion to allow qualified individuals up to an additional year to repay their plan loans.

The Q&A provides some additional information about the CARES Act provisions.

Coronavirus-Related Distributions

A coronavirus-related distribution is a distribution that is made from an eligible retirement plan to a qualified individual on or after January 1, 2020, to before December 31, 2020, up to an aggregate limit of $100,000 from all plans and IRAs. Thus, under the Q&A, a distribution made on December 31, 2020 will not be treated as a coronavirus-related distribution. The 10% additional tax on early distributions does not apply to coronavirus-related distributions. Plan administrators may rely on a participant's certification that the participant is a qualified individual. Qualified individuals will use Form 8915-E (expected to be available before the end of 2020) to report repayment of a coronavirus-related distribution and to determine the amount of a coronavirus-related distribution includible in income for a year.

Repayment of Coronavirus-Related Distributions

Part or all of a coronavirus-related distribution may be repaid to any eligible retirement plan so long as the repayment is completed within three years of the date of distribution. Repayments are treated as being repaid in a direct trustee-to-trustee transfer. Plans should generally accept repayments as rollover contributions. However, eligible retirement plans are not required to accept rollover contributions. If a plan does not accept rollover contributions, it is not required to accept repayment of coronavirus-related distributions.

Income Tax Reporting Requirements

Coronavirus-related distributions may be included in income ratably over a three-year period, starting with the year of distribution. For example, a participant who receives a $9,000 coronavirus-related distribution in 2020 could report $3,000 in income on each of the participant's federal income tax returns for 2020, 2021, and 2022. The participant could also choose to include the entire distribution in the year of the distribution.

A coronavirus-related distribution is reported by the retirement plan on Form 1099-R. This reporting is required even if the qualified individual repays the coronavirus-related distribution in the same year. The IRS expects to provide more information on how to report these distributions later this year. The Q&A does reference Section 3 of IRS Notice 2005-92 in relation to the reporting of coronavirus-related distributions. Notice 2005-92 allowed payors to report Hurricane Katrina distributions using Distribution Code 2 (early distribution, exception applies) in Box 7 of Form 1099-R. However, Notice 2005-92 also said that payors were permitted to report Hurricane Katrina distributions using Distribution Code 1 (early distribution, no known exception) in Box 7 of Form 1099-R.

Coronavirus-Related Distributions are Optional

The IRS confirms in the Q&A that the coronavirus-related distribution provisions of the CARES Act are optional for plan sponsors. Thus, plans are not required to offer coronavirus-related distributions. However, even if a plan does not allow for coronavirus-related distributions, a qualified individual may treat a distribution as a coronavirus-related distribution on the individual's tax return.

Distributions from Defined Benefit Plans

A coronavirus-related distribution is treated as meeting the distribution restrictions for a 401(k) plan, 403(b) plan, or governmental 457(b) plan. However, the IRS points out that the CARES Act does not change any other existing limits on when plan distributions are allowed. Specifically, pension plans, including a money purchase plan or a defined benefit plan, are not permitted to make a distribution merely because the distribution would qualify as a coronavirus-related distribution. Pension plans may only make distributions upon a distributable event.

Plan Loan Relief

The IRS guidance also makes clear that the CARES Act relief for loans is optional for plan sponsors to implement. The guidance permits loan repayments for qualified individuals to be delayed for one year. If a plan does allow delayed plan loan payments, any payments after the suspension period must be adjusted to reflect the delay and any interest accruing during the delay. The delay is disregarded in determining compliance with the five-year term limit. (Please note that, under IRS Notice 2020-23, the IRS provided broad plan loan repayment relief, permitting any plan participant who has a plan loan payment due from April 1, 2020 through July 14, 2020 to delay payment until July 15, 2020.)

Plans may also increase the maximum loan amount available to qualified individuals, up to the lesser of $100,000 (minus any outstanding loans) or the participant's vested benefit under the plan. Again, this provision is also optional.

Future Guidance

The IRS and the Treasury Department are formulating guidance on Section 2202 and expect to release it "in the near future." The IRS cites Notice 2005-92, which provided guidance on the tax treatment of distributions and plan loans under Sections 101 and 103 of the Katrina Emergency Tax Relief Act of 2005 ("KETRA"). The IRS expects the guidance on the CARES Act will apply the principles of Notice 2005-92 to the extent the provisions of the CARES Act are "substantially similar" to the provisions of KETRA that Notice 2005-92 addressed.

The IRS also points out that the Treasury Department may expand the factors taken into account to determine whether an individual is a qualified individual as a result of experiencing adverse financial consequences.

For more information about the CARES Act and how it might affect your employee benefit plans, please contact Gary Blachman, Audra Ferguson-Allen, Sarah Funke, Rob Gauss, Melissa Proffitt, Kathleen Sheil Scheidt, Tara Sciscoe, Chris Sears, or the Ice Miller LLP Employee Benefits attorney with whom you work.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.