The Internal Revenue Service (“IRS”) recently issued frequently asked questions (“FAQs”) addressing several issues for defined contribution retirement plans under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Further guidance is expected later this year.
As background, the CARES Act, which was signed into law on March 27, 2020, is intended to provide qualified plan participants—those who have been diagnosed with COVID-19, or whose spouse or dependent has been diagnosed with COVID-19, or who have suffered a COVID-19-related financial hardship—easier access to their retirement accounts. Specifically, plans are permitted to adopt the following changes:
- Suspend required minimum distributions that would have been payable in 2020.
- Suspend repayments for loans made to qualified participants through December 31, 2020.
- Permit special coronavirus-related distributions (“CRDs”) to qualified participants of up to $100,000, without the usual penalty on distributions to participants before age 59½. CRDs may be repaid to the participant’s account over a three-year period, and the participant may elect to divide up the taxable amount of the distribution evenly over three years.
- Temporarily increase the maximum amount of a loan to a qualified participant to $100,000.
The IRS issued FAQs to provide preliminary guidance to plans in implementing these provisions of the CARES Act, with the aim of following the relief offered after Hurricane Katrina under IRS Notice 2005-92, and more detailed guidance for retirement plans is expected later in 2020. For now, the FAQs clarify the following:
- It is optional for eligible defined contribution plans to permit qualified participants to suspend loan repayments, to offer CRDs, and to increase loan maximums on a temporary basis.
- If such plans permit increased loan maximums, those increased limits apply to loans made between March 27, 2020, and September 22, 2020.
- Plan administrators are permitted to rely on a participant’s certification that he or she is qualified to receive a CRD, absent actual knowledge by the plan administrator that the individual does not qualify under the COVID-19 criteria.
- Plans that do not otherwise accept rollover contributions are not required to accept repayment of CRDs. While the CARES Act generally permits participants to repay a CRD within three years of the date of the distribution and provides that CRD repayments are treated as rollover contributions, the FAQs clarify that if an eligible plan does not otherwise accept rollover contributions, it is not required to change its rules to accept CRD repayments.
- Regardless of whether a plan permits CRDs, a qualified participant may treat a distribution as a CRD for income tax purposes if both the participant and the distribution otherwise meet the requirements for a CRD. Participants must report any CRDs on their 2020 income tax returns, and will have the option of reporting the CRD as income either by (a) dividing it evenly over the years 2020, 2021, and 2022, or (b) reporting the entire amount as income for 2020 only.
- Plans are required to report any CRDs to the IRS on Form 1099-R, even if the CRD is repaid during the same year. An individual can use Form 8915-E (expected to be available by the end of this year) to report any repayment of a CRD, and may file for a refund of tax paid on the distribution in a previous year by submitting a revised Form 1040.
- Although the CARES Act permits plans to make CRDs to participants regardless of age, it does not otherwise change a plan’s rules for distributions. This means that, unlike 401(k), 403(b) and 457 plans, money purchase plans are not permitted to make CRDs to participants unless the participant has reached the minimum distribution age under the plan. Under other recent legislation, money purchase plans are permitted to reduce the minimum distribution age from 62 to 59½.
In addition to the flexibility available to plans and participants under the CARES Act, participants also may be able to take advantage of a hardship distribution in connection with COVID-19. Under regulations issued in September 2019, the IRS safe harbor for hardship withdrawals from a 401(k) or 403(b) plan was revised to include expenses and losses incurred due to a disaster declared by FEMA, provided that the participant’s principal residence or place of employment at the time of the disaster was located within an area designated by FEMA for individual assistance. Consequently, plans that adopt the new safe harbor rules may make hardship distributions available to participants who live and work in these areas. Currently over 40 states and the District of Columbia have been designated for individual assistance, and FEMA continues to update the list based on the spread of the virus.
Please contact Slevin & Hart for more information about how the CARES Act and recent guidance affect your plan.
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