Seyfarth Synopsis: The IRS has issued some initial guidance on the coronavirus-related relief for retirement plans (and IRAs) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) in the form of Q&As on its website. Most of the Q&As address coronavirus-related distributions (“CV Distributions”), while one Q&A provides some IRS insight relating to the loan relief, referencing an old IRS Notice that answered questions about the plan distribution and loan relief issued after Hurricane Katrina. This blog post discusses the Q&As relating to the CV Distributions. The Q&A related to the CARES Act loan relief is discussed in a separate post.
Earlier this week, the IRS released Q&As on its website related to the CV Distributions now permitted pursuant to the CARES Act. These Q&As specifically state that the IRS intends to release additional guidance on this provision in the “near future,” which is anticipated to follow the principles of IRS Notice 2005-92, issued after the enactment of analogous relief legislation following Hurricane Katrina (“KETRA”). Given the similarity in the statutory language of the CARES Act and KETRA, we expect that will be the case.
As discussed in more detail in a prior post, the CARES Act allows IRA owners and retirement plan participants who are either diagnosed with the SARS-CoV-2 virus or with coronavirus disease 2019 (COVID-19) or whose spouse or dependent is diagnosed with the virus or disease to take distributions up to a total of $100,000 from January 1, 2020, to December 30, 2020 (“CV Distributions”). Alternatively, an individual is eligible for a CV Distribution if he or she experiences adverse financial consequences stemming from the virus or disease as a result of being quarantined, furloughed, laid off, having reduced work hours, being unable to work due to lack of child care, the closing or reduction of hours of a business owned or operated by the individual or other factors determined by Treasury. Adverse financial consequences experienced due to a spouse’s quarantine, furlough, lay-off, etc. do not qualify an individual for a CV Distribution under this statutory provision. Plan administrators and participants alike have been hoping for guidance that would expand the ability to take CV Distributions for participants in these circumstances. The Q&As merely indicate, however, that the IRS and Treasury have received and are reviewing comments requesting the expansion of these factors. Further, the Q&As clarify that the plan administrator may rely on an individual’s certification that he or she meets these requirements, unless the plan administrator has actual knowledge to the contrary.
CV Distributions may be included in income ratably over three years (i.e., 2020, 2021 and 2023), or a recipient may choose to include the entire amount in income in 2020. The CARES Act also allows a recipient to repay all or a portion of a CV Distribution to a defined contribution retirement plan or IRA within three years of the day following the date of the CV Distribution. The Q&As point to Notice 2005-92, describing similar KETRA relief, for examples on how repayments will work, subject to the issuance of further guidance. Under Notice 2005-92, if a taxpayer chooses to include CV Distribution in income over three years but repays all or part of that CV Distribution at one or more points during that three-year period, any repayment amount offsets the income inclusion required for the portion of the CV Distribution for the year in which the repayment is made. If a repayment amount is more than the CV Distribution amount that would be included in income under the three-year method in the repayment year, the taxpayer can carry the excess forward or backward. To carry it backward, the taxpayer would need to file an amended return for the prior year to reduce his or her gross income in that prior year by the amount of the excess repayment. The repayment to a plan or IRA is treated as though it were repaid in a direct trustee-to-trustee transfer.
Any CV Distribution from a plan should be reported on a Form 1099-R, and the Q&As state that the IRS plans to provide more guidance on this reporting later this year. Repayments of CV Distributions will be reported to the IRS by the taxpayer recipient on a Form 8915. Further, state tax rules may differ from these federal rules, so taxpayers should be certain to check the tax laws of their state when considering a CV Distribution.
The IRS also clarified that adding a CV Distribution to a plan is optional, and that plan sponsors can choose whether or not to permit them. Even if a plan does not permit these distributions, taxpayers who otherwise meet the requirements under the CARES Act for a CV Distribution and who otherwise qualify for a distribution under the terms of the particular plan (e.g., age 59½, hardship, following severance from employment) may treat such a distribution as a CV Distribution on the individual’s federal income tax return, and thus avail himself or herself of the optional three-year tax treatment and repayment option allowed for a CV Distribution.
The Q&As further clarify that plans that do not accept rollover contributions are not required to accept re-contributions of CV Distributions.
Remember, for plans that do adopt the CV Distribution provisions, amendments are generally not required to be adopted until the end of 2022 for calendar year plans.