Archived Insight | May 12, 2020
The IRS has issued guidance in the form of FAQs that clarifies the distribution and loan relief provisions made available to retirement plans under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
The guidance makes it clear that:
Scroll down for more information about each of these clarifications, which were made in the form of answers to frequently asked questions (FAQs).
The CARES Act provisions that address plan distributions and loans give “qualified individuals” tax relief on up to $100,000 of CRDs received from eligible retirement plans during the period from January 1, 2020, through December 30, 2020.
In addition, the CARES Act allows plan sponsors to provide the following additional relief to qualified individuals:
Tax relief for CRDs consists of elimination of the 10 percent excise tax on early distributions; the ability to take the distributions into income ratably over three years; and the ability to recontribute the distributions within three years of the date of distribution. In addition, the plan is not required to offer direct rollovers, to provide a 402(f) notice, or to take 20 percent withholding (but 10 percent withholding is required if not waived).
We discussed these and other retirement plan provisions of the CARES Act in our March 30, 2020 web post.
The language of the CARES Act provisions that address plan distributions and loans is very similar to the language in the Katrina Emergency Tax Relief Act of 2005 (KETRA), passed in response to Hurricane Katrina in 2005. IRS issued Notice 2005-92 to provide guidance on how the KETRA provisions were to be implemented.
The new guidance confirms that the IRS will rely on the principles of Notice 2005-92 in addressing similar provisions of the CARES Act.
Some practitioners hoped that the CARES Act could be interpreted as permitting DB plans and MP plans to make in-service CRDs without restrictions, as 401(k), 403(b) and governmental 457(b) plans were permitted to do.
FAQ-10 makes it clear that the CARES Act did not create such a new in-service distribution option for MP or DB plans.
However, distributions to qualified individuals that are already allowed under MP and DB plans can be treated as CRDs.
The CARES Act does not change the spousal consent rules. If benefits under a plan are subject to the spousal consent rules, the fact that a distribution is a CRD does not eliminate that requirement.
The FAQs do not eliminate the need for, or address what might satisfy, the regulatory requirement that the signature of the person making the election is witnessed in the physical presence of a plan representative or notary.
Some practitioners believe that the current definition of “qualified individual” is too narrow because it leaves out some common situations. Two examples are: a participant whose spouse has been laid off, but neither the participant nor the spouse has tested positive for the coronavirus, and a participant whose salary has been reduced but whose work hours have not.
The IRS has authority to expand the definition of a “qualified individual” for a CRD or loan. FAQ-3 states that Treasury and the IRS have received and are reviewing comments from the public requesting that the list of factors be expanded.
Before the FAQs were issued, it appeared that plans could rely on an individual’s “self-certification” of his or her status as a “qualified individual” with no further requirements. FAQ-11 clarifies that a plan may rely on the self-certification unless the plan administrator has “actual knowledge” that the participant has not, in fact, met the “qualified individual” eligibility requirements.
There have been many questions on the repayment of CRDs. FAQ-7 specifies that the three years to repay starts on the date that the distribution was received.
It also explains the possible need for amended federal income tax returns and refers to sections 4.D, 4.E and 4.F of Notice 2005-92 (the guidance issued after Hurricane Katrina) for examples.
FAQ-12 makes it clear that if a plan doesn’t accept rollovers, it doesn’t have to accept CRD repayment rollovers. It implies, however, that if a plan accepts rollovers, it should take repayment rollovers as well.
Some practitioners were concerned that that plans might be required to adopt the loan provisions in the CARES Act, and/or that they might not be able to tailor the provisions to provide less than the maximum available relief. FAQ-9 makes clear that all elements of the loan program are discretionary on the part of the plan. The plan may adopt both the increased loan amount and the delay of 2020 repayments, either one or neither one, and may offer less than maximum relief.
There also had been questions whether, under the CARES Act, a participant could delay 2020 loan payments even if the plan did not specifically provide for delay. FAQ-9 clarifies that a participant may not delay payments unless the plan has adopted that provision.
FAQ-6 provides that the three-year inclusion of income on up to $100,000 of CRD income is the default rule — spreading the income tax on CRDs received in 2020 equally over three years (2020, 2021 and 2022). A participant may elect to take the entire amount into income for the 2020 year instead.
With regard to tax reporting, FAQ-13 states that qualified individuals will report CRD income on their individual federal income tax returns for 2020. Whether or not a qualified individual is required to file such a return, the individual will have to file a revised (not yet issued) Form 8915-E to report repayments and income inclusion. FAQ-14 advises plans that CRDs are reported on Form 1099-R, and further states that IRS will provide more information on how to report these distributions later this year.
The FAQs do not cover CARES Act §2203 that waived required minimum distributions (RMDs) for 2020. Given its reliance on Notice 2005-92 for interpretations of CARES Act §2202, IRS guidance on CARES ACT §2203 is likely to be based on Notice 2009-82, which dealt with the similar waiver of the 2009 RMDs under the Worker, Retiree and Employer Recovery Act of 2008.
The FAQs also do not cover CARES Act §3608, providing temporary funding relief for single-employer DB plans. Act §3608 allows employers to postpone quarterly and annual contributions due in calendar 2020 to single-employer DB plans (other than CSEC plans) to January 1, 2021. It also allows employers to elect to use the plan’s adjusted funding target attainment percentage (AFTAP), which governs benefit restrictions under IRC §436, for the last plan year ending before January 1, 2020, as the AFTAP for plan years that include calendar year 2020. It is unclear whether IRS will issue guidance on this CARES Act section.
The FAQs indicate that there will be more guidance on CARES Act §2202 “in the near future” and that the guidance will, like the FAQs, reflect the principles of Notice 2005-92 to the extent that the language of KETRA and the CARES Act is the same. More guidance on reporting requirements also is expected to be provided this year.
The information on this webpage is preliminary and subject to revision as additional guidance is provided. On all issues involving the interpretation or application of laws and regulations, plan sponsors should discuss the issues raised here with their legal, tax and other advisors before determining how the issues apply to their specific situations.
This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.
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