Under Section 2202 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), eligible retirement plans, which include 401(k) plans, may permit participants who are impacted by coronavirus pandemic to access their account balances through a special “coronavirus-related distribution” and/or through changes to the plan’s loan provisions.
On May 4, 2020, the Internal Revenue Service (“IRS”) posted guidance on IRS’s website, in a question and answer format, that addresses coronavirus-related distributions and plan loan changes referenced above (“IRS CARES Act Q&As”).
Section 2202(a) of the CARES Act permits a plan to allow a participant in a 401(k) plan, 403(a) plan, 403(b) plan, or governmental 457(b) plan (an “eligible retirement plan”) or an IRA to request a coronavirus-related distribution (“CRD”) of up to $100,000 from the plan during 2020. The $100,000 distribution amount is in the aggregate from all of an individual’s plans and IRAs.
An individual is eligible for the CRD (a “qualified individual”):
Who, or whose spouse or dependent (as defined in Section 152 of the Internal Revenue Code (the “Code”)), is diagnosed with the virus SARS-CoV-2 or with coronavirus disease (together, “COVID-19”) by a test approved by the Centers for Disease Control and Prevention; or
Who, due to COVID-19, experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual, or other factors as determined by the Secretary of the Treasury.
The CARES Act provides that the administrator of the plan is permitted to rely on the participant’s certification that the conditions for the CRD are met.
The 10% early distribution penalty for individuals under age 59½ and mandatory 20% tax withholding requirement are waived. While the CRD is still a taxable distribution, it may be included in gross income ratably over three years from the distribution date.
Participants may recontribute the amount of the CRD to the plan or an IRA during the 3-year period following distribution without regard to Code’s contribution limits.
Plan Loan Relief
Section 2202(b) makes two changes to the plan loan rules for qualified individuals: (1) an increase in the maximum loan limits; and (2) a delay in the repayment date for outstanding plan loans.
First, the maximum loan amount available under an eligible retirement plan for a qualified individual is increased to the lesser of $100,000 (minus an individual’s outstanding plan loans) or 100% of the individual’s vested account balance from the lesser of $50,000 (minus an individual’s outstanding plan loans) or 50% of the individual’s vested account balance. The increased limits apply to plan loans made during the 180-day period beginning on March 27, 2020 (the enactment date of the CARES Act) and ending on September 23, 2020.
Second, plan loan repayments that are due between March 27, 2020 and December 31, 2020 for outstanding loans of qualified individuals may be delayed for one year. When repayments recommence, the repayment amount will be adjusted to reflect the delay and interest that accrued during the delay period. However, the delay period is disregarded for purposes of the maximum loan period.
A plan must be amended for the CRD and/or loan provision changes no later than the end of the plan year commencing on or after January 1, 2022 (or such later date provided by the Department of the Treasury (“Treasury”)) – December 31, 2022, for a calendar year plan. Governmental plans have two additional years to be amended. (Note that the amendment deadline also applies for the waiver of the 2020 required minimum distribution provision under defined contribution plans, which include 401(k) plans, and IRAs under Section 2203 of the CARES Act.)
IRS CARES Act Q&As
The IRS CARES Act Q&As address a number of implementation and operational questions for plan sponsors and administrators. Several of the Q&As of particular interest are discussed below.
Q&A-2 states that IRS and Treasury are working on additional guidance on Section 2202. That guidance will follow the approach used in Notice 2005-92, which provided guidance on special distribution and plan loan provisions under the Katrina Emergency Tax Relief Act of 2005 (“KETRA”), to the extent the Section 2202 provisions are substantially similar to the KETRA provisions. Thus, where applicable, the Q&As refer to the appropriate section in Notice 2005-92.
Q&A-3 provides that additional guidance may be issued in order to expand the list of factors taken into account to determine whether someone is a qualified individual as a result of experiencing adverse financial consequences. IRS and Treasury are currently receiving and reviewing comments from the public requesting that the list of factors be expanded.
As noted above, Section 2202 permits a participant to (1) include a CRD in income ratably over a three-year period beginning with the distribution year and (2) repay all or part of the amount of the CRD to an eligible retirement plan during the three-year period following the distribution date. If all or a portion of the CRD is repaid to a plan, it is treated as a direct trustee-to-trustee transfer thereby avoiding the distribution being treated as taxable income. Q&A-7 explains that if a participant elects to include the CRD amount in income over a three-year period - 2020, 2021, and 2022 - and then desires to repay the full amount of the CRD to an eligible retirement plan in 2022, the participant would file amended federal income tax returns for 2020 and 2021 to claim a refund of the tax attributable to the amount of the CRD included in income for those years. However, no portion of the CRD would be included in taxable income for 2022 in this example. For other repayment situations (e.g., partial repayments of the CRD), Q&A-7 provides that the examples in Notice 2005-92 should be considered.
While Section 2022 is clear that the CRD and increase in plan loan limits are optional, Section 2022 is not clear whether the plan loan repayment delay is optional or mandatory. Q&A-9 confirms that it is optional. In addition, if an employer does not add the CRD to its plan, a qualified individual may still treat a distribution that otherwise meets the requirements of a CRD as a CRD on the individual’s federal income tax return.
Section 2022 provides that the plan administrator may rely on an individual’s self-certification that the individual is eligible to receive a CRD. However, Q&A-11 conditions such reliance with the phrase “unless the administrator has actual knowledge to the contrary.”
Q&A-12 confirms that an eligible retirement plan is not required to accept repayment of a participant’s CRD. If accepted, the CRD is to be treated as a rollover contribution.
Finally, Q&A-14 explains that plans should report CRDs to qualified individuals on a Form 1099-R. This reporting is required even if a qualified individual repays the CRD to the plan in the same year as the distribution date. More information regarding how to report CRDs is expected later in 2020.
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