The Internal Revenue Service (IRS) has (some) answers! The IRS released a set of FAQs on its website focusing exclusively on coronavirus-related relief for retirement plans and IRAs (“Retirement Plan FAQs”). Read the Retirement Plan FAQs here.
The Retirement Plan FAQs provide much needed direction for plan sponsors and record keepers. The IRS and Treasury Department anticipate: (1) issuing more formal guidance in the near future; and (2) that this subsequent assistance will follow the principals of the 2005 guidance issued for the distribution and loan relief provisions included in the Katrina Emergency Tax Relief Act (KETRA), to the extent the Coronavirus Aid, Relief and Economic Security Act (CARES Act) provisions are substantially similar to the KETRA provisions.
Highlights of the Retirement Plan FAQs follow below:
The Retirement Plan FAQs specify that the factors taken into account to determine whether an individual is a “Qualified Individual” eligible for a coronavirus‑related distribution or loan are based only on the adverse financial consequences of the individual, not on those of the spouse or dependent. Under the CARES Act, the Treasury Department and the IRS may issue guidance expanding the list, however. The Retirement Plan FAQs state the Treasury Department and the IRS have received, and currently are reviewing, comments from the public requesting that the list of factors be expanded. So, additional relief might be forthcoming.
Under the CARES Act, the plan administrator may rely on individuals' certifications that they satisfy the conditions to be a “Qualified Individual” in determining whether a distribution is a coronavirus-related distribution. The Retirement Plan FAQs add the caveat that the plan administrator may not rely on that certification, however, if the plan administrator has actual knowledge to the contrary.
Furthermore, individuals may treat the distribution as a coronavirus-related distribution on their federal income tax return only if they actually meet the eligibility requirements. Consequently, participants who falsely claim to be eligible when they are not may be subject to income tax penalties.
Coronavirus-Related Distributions and Pension Plans
Under the CARES Act, a coronavirus-related distribution is treated as meeting the distribution restrictions under a Code Section 401(k), 403(b) or governmental 457(b) plan. This means a 401(k) plan may permit a coronavirus-related distribution even if it would occur before an otherwise permitted distribution event (such as severance from employment, disability or reaching age 59 ½).
The CARES Act, however, does not change when distributions are permitted to be made from money purchase plans and defined benefit plans. This means a money purchase plan or defined benefit pension plan cannot make a coronavirus‑related distribution before a permitted event merely because the distribution, if made, would qualify as a coronavirus-related distribution. But participants who receive a lump sum distribution during 2020 from a money purchase plan or defined benefit plan, and who otherwise satisfy the requirements for a coronavirus‑related distribution, are permitted to treat the distribution (up to the CARES Act $100,000 maximum) as coronavirus-related on their own federal income tax return.
Coronavirus-Related Distributions and Loans are Optional
An employer is permitted to choose whether, and to what extent, to amend its plan to provide for coronavirus-related distributions and/or loans. For example, an employer may add coronavirus‑related distributions and not change its plan loan provisions to increase the loan amount or suspend loan repayment schedules.
The clarification of loan payment suspensions is particularly helpful. The language in the CARES Act seemed to indicate the delay was required, while the IRS safe-harbor guidance for KETRA interpreted similar statutory language as optional. The Retirement Plan FAQs confirm the CARES Act loan suspension provisions will be treated as optional, the same as under the KETRA guidance.
The Retirement Plan FAQs further state that even if a plan is not amended to add coronavirus‑related distributions, participants who receive a plan distribution during 2020, and who otherwise satisfy the requirements for a coronavirus‑related distribution, are permitted to treat the distribution as coronavirus-related on their own federal income tax return.
Repayment of Coronavirus-Related Distributions
If a plan accepts rollover contributions, the Retirement Plan FAQS seem to say the plan is required to accept repayments of coronavirus‑related distributions. Conversely, if a plan does not accept rollovers, it need not be amended to add rollover contributions and would not be required to accept repayments.
Reporting Coronavirus-Related Distributions to the IRS
The plan must report payment of a coronavirus-related distribution on IRS Form 1099‑R (Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.). Reporting is required even if the participant repays the coronavirus‑related distribution in the same year. The IRS expects to provide more information later this year, but refers employers to the KETRA guidance in the meantime.
For More Information on COVID‑19 Compliance
Visit Warner’s COVID Resource Center for the latest insight into COVID‑19 developments.
Warner is here to help! If you need assistance with implementing the CARES Act retirement plan provisions, please contact Lisa Zimmer or a member of Warner’s Employee Benefits and Executive Compensation Practice Group.