By Pension and Benefits Editorial Staff
The IRS has issued questions and answers (Q&As) on coronavirus-related relief for retirement plans and IRAs. Section 2202 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (P.L. 116-136), enacted on March 27, 2020, provides for special distribution options and rollover rules for retirement plans and IRAs, and expands permissible loans from certain retirement plans.
The IRS notes that, in general, section 2202 of the CARES Act provides for expanded distribution options and favorable tax treatment for up to $100,000 of coronavirus-related distributions from eligible retirement plans (certain employer retirement plans, such as 401(k) and 403(b) plans, and IRAs) to qualified individuals, as well as special rollover rules with respect to such distributions. The CARES Act also increases the limit on the amount a qualified individual may borrow from an eligible retirement plan (not including an IRA) and permits a plan sponsor to provide qualified individuals up to an additional year to repay their plan loans.
Coronavirus-related distributions. A coronavirus-related distribution is a distribution that is made from an eligible retirement plan to a qualified individual from January 1, 2020 to December 30, 2020, up to an aggregate limit of $100,000 from all plans and IRAs. The distributions generally are included in income ratably over a three-year period, starting with the year in which the distribution is received. However, there is an option of including the entire distribution in income for the year of the distribution. The 10% additional tax on early distributions does not apply to any coronavirus-related distribution, according to the IRS.
In answer to a question about repaying coronavirus-related distributions, the IRS explained that, in general, participants may repay all or part of the amount of a coronavirus-related distribution to an eligible retirement plan, provided that the repayment is repaid within three years after the date that the distribution was received. If a participant repays a coronavirus-related distribution, the distribution will be treated as though it was repaid in a direct trustee-to-trustee transfer so that you do not owe federal income tax on the distribution.
The IRS provided additional guidance in an example. If a participant receives a coronavirus-related distribution in 2020, and chooses to include the distribution amount in income over a three-year period (2020, 2021, and 2022) and to repay the full amount to an eligible retirement plan in 2022, the participant may file amended federal income tax returns for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution that was included in income for those years, and the participant will not be required to include any amount in income in 2022.
Under section 2202 of the CARES Act, a coronavirus-related distribution is treated as meeting the distribution restrictions for a 401(k) plan, 403(b) plan, or governmental 457(b) plan. The IRS notes, for example, under section 2202 of the CARES Act, a 401(k) plan may permit a coronavirus-related distribution, even if it would occur before an otherwise permitted distributable event (such as severance from employment, disability, or attainment of age 59 1/2).
However, the CARES Act does not otherwise change the limits on when plan distributions are permitted to be made from employer-sponsored retirement plans, according to the IRS. For example, a pension plan (such as a money purchase pension plan) is not permitted to make a distribution before an otherwise permitted distributable event merely because the distribution, if made, would qualify as a coronavirus-related distribution. Further, a pension plan is not permitted to make a distribution under a distribution form that is not a qualified joint and survivor annuity without spousal consent merely because the distribution, if made, could be treated as a coronavirus-related distribution.
The administrator of an eligible retirement plan may rely on an individual’s certification that the individual satisfies the conditions to be a qualified individual in determining whether a distribution is a coronavirus-related distribution, unless the administrator has actual knowledge to the contrary. The IRS explains that, although an administrator may rely on an individual’s certification in making and reporting a distribution, the individual is entitled to treat the distribution as a coronavirus-related distribution for purposes of the individual’s federal income tax return only if the individual actually meets the eligibility requirements.
In answer to a question concerning whether eligible retirement plans are required to accept repayments of participants’ coronavirus-related distributions, the IRS stated that, in general, it is anticipated that eligible retirement plans will accept repayments of coronavirus-related distributions, which are to be treated as rollover contributions. However, eligible retirement plans generally are not required to accept rollover contributions. For example, if a plan does not accept any rollover contributions, the plan is not required to change its terms or procedures to accept repayments.
Reporting coronavirus-related distributions. Qualified individuals should report coronavirus-related distributions on their individual federal income tax returns for 2020, according to the IRS. The taxable portion of the distributions must be included in income ratably over the three-year period - 2020, 2021, and 2022 - unless the individuals elect to include the entire amount in income in 2020. Whether or not qualified individuals are required to file a federal income tax return, Form 8915-E will be used (which is expected to be available before the end of 2020) to report any repayment of coronavirus-related distributions and to determine the amount of any coronavirus-related distributions includible in income for a year.
The IRS stated that eligible retirement plans must report the payment of a coronavirus-related distribution to a qualified individual on Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. This reporting is required even if the qualified individual repays the coronavirus-related distribution in the same year, according to the IRS. The IRS expects to provide more information on how to report these distributions later this year.
Plan loan relief. Under section 2202 of the CARES Act, an additional year for repayment of loans from eligible retirement plans (not including IRAs) is permitted and limits on loans are relaxed. Specifically, if a loan is outstanding on or after March 27, 2020, and any repayment on the loan is due from March 27, 2020 to December 31, 2020, that due date may be delayed under the plan for up to one year. In addition, for plan loans made to a qualified individual from March 27, 2020 to September 22, 2020, the limit may be increased up to the lesser of: (1) $100,000 (minus outstanding plan loans of the individual), or (2) the individual’s vested benefit under the plan.
The IRS notes that it is optional for employers to adopt the distribution and loan rules of section 2202 of the CARES Act. An employer is permitted to choose whether, and to what extent, to amend its plan to provide for coronavirus-related distributions and/or loans that satisfy the provisions of section 2202 of the CARES Act. However, even if an employer does not treat a distribution as coronavirus-related, a qualified individual may treat a distribution that meets the requirements to be a coronavirus-related distribution as coronavirus-related on the individual’s federal income tax return.
Future guidance. In answer to the question of whether the IRS intends to issue guidance on section 2202, the IRS states that the Treasury Department and the IRS are working on guidance and anticipate releasing the guidance in the near future. They anticipate that the guidance on the CARES Act will apply the principles of IRS Notice 2005-92 to the extent the provisions of section 2202 of the CARES Act are substantially similar to the provisions of Katrina Emergency Tax Relief Act of 2005 that are addressed in that notice.
After listing what a qualified individual is for purposes of section 2202 of the CARES Act, the IRS explains that the Treasury Department and the IRS may issue guidance that expands the list of factors taken into account to determine whether an individual is a qualified individual as a result of experiencing adverse financial consequences. The Treasury Department and the IRS have received and are reviewing comments from the public requesting that the list of factors be expanded.
Source: IRS coronavirus-related relief for retirement plans and IRAs questions and answers.
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