IRS Issues Guidance On Expansion Of Retirement Plan Distributions And Loans
On May 4, 2020, the IRS issued FAQ guidance on the expansion of retirement plan distributions and loans, as permitted by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The FAQ guidance is available here. The IRS intends to issue more formal guidance on the expanded distribution options under the CARES Act, but for now, this FAQ guidance sheds some light on the IRS’s interpretation of the Act.
The CARES Act, enacted March 27, 2020, provides for expanded distribution options and favorable tax treatment to participants of qualified retirement plans (including individual retirement accounts (“IRAs”)) (for more information, click here). Between January 1, 2020, and December 30, 2020, participants may withdraw up to $100,000 from qualified retirement accounts for COVID-19-related reasons without incurring the 10% penalty on early distributions. The CARES Act also expanded the retirement plan loan cap and extends the due date of plan loan repayments due between March 27, 2020, and December 31, 2020, for up to one year.
Eligibility for Coronavirus-Related Distributions
The FAQ guidance emphasizes that a person is only eligible for a coronavirus-related distribution if the individual:
- Is diagnosed with the virus by a test approved by the Centers for Disease Control and Prevention (“CDC”);
- Has a spouse or dependent who is diagnosed with the virus by a test approved by the CDC; or
- Experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, or having work hours reduced due to the virus; as a result of being unable to work due to lack of child care due to the virus; or as a result of closing or reducing hours of a business owned or operated by the individual as a result of the virus.
A plan administrator of a qualified retirement plan may rely on an individual’s certification that the individual satisfies the conditions to be eligible to receive a coronavirus-related distribution, unless the plan administrator has actual knowledge to the contrary.
Expansion of Distribution and Loan Options Optional to the Employer
The IRS clarifies that the expanded distribution and loan options under the CARES Act are optional and that employers are not required to provide such distribution and loan options. Additionally, employers may choose the extent of the relief provided under their qualified retirement plans (e.g., an employer may elect to permit coronavirus-related distributions but not expanded plan loans).
Repayments by the Employee
The coronavirus-related distributions are included in an employee’s income ratably over a three-year period, starting with the year in which the employee receives the distribution (2020). And while the CARES Act allows individuals to repay coronavirus-related distributions during the three-year period after the distribution is received, the FAQ guidance clarifies that plans are not required to allow the distributions to be repaid. If a plan does permit repayments of the coronavirus-related distributions, the distribution will be treated as though repaid in a direct trustee-to-trustee transfer, thereby eliminating any federal income tax treatment on the distribution to the employee.
For example, if an employee receives a coronavirus-related distribution in 2020, the employee may include the distribution in income ratably over a three-year period (2020, 2021, and 2022). If the employee then elects to repay the full amount of the distribution to an eligible retirement plan in 2022, the employee may file amended tax returns for 2020 and 2021 to claim a refund of the tax attributable to the distribution included in income in such years.
Reporting of the Distributions
Individuals must report their coronavirus-related distributions on their individual federal income tax return for 2020 using the IRS’s new Form 8915-E (anticipated to be available by the end of 2020). Taxable income attributable to a distribution may be included in the individual’s income either (a) all in 2020, or (b) ratably over a three-year period (2020, 2021, and 2022).
Retirement plans that provide coronavirus-related distributions must report the distributions on Form 1099-R, even if the distribution is repaid.
While this informal FAQ guidance clarifies some of the questions left open by the CARES Act, additional IRS guidance regarding coronavirus-related distributions and plan loans is expected. Plan sponsors wishing to take advantage of the expanded coronavirus-related distributions and plan loans should amend their plans consistent with the Act and this FAQ guidance.