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May 11, 2020

Stroock Special Bulletin

By: David C. Olstein, Austin S. Lilling, Abbey L. Keppler

The Internal Revenue Service (“IRS”) recently released a list of frequently asked questions and answers (the “FAQs”) addressing various issues related to the retirement plan distribution and loan provisions of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), enacted on March 27, 2020. In this bulletin, and as a supplement to Stroock’s earlier publications, we highlight the most significant guidance contained in the FAQs.

Retirement Plan Provisions of CARES Act

As we discussed in our recent bulletin addressing the tax provisions of the CARES Act,[1] the CARES Act made a number of changes to federal law to afford individuals affected by COVID-19 (“qualified individuals”)[2] greater access to their retirement savings.  The CARES Act permits eligible retirement plans to be amended to provide certain benefits for qualified individuals participating in such eligible retirement plans, such as:

  • the ability to take special, penalty-free distributions of up to $100,000 and the option to: (i) repay all or a portion of the distribution within the three years following distribution to avoid including such distributions in their taxable income or (ii) include the distribution in taxable income ratably over such three-year period;
  • an increase in plan loan limits from $50,000 to $100,000 during the 180-day period following the enactment of the CARES Act and a one-year delay of the repayment date of any loan coming due before the end of 2020; and
  • relief for individuals subject to required minimum distribution requirements.

For a more detailed description of the retirement plan provisions of the CARES Act, see our previous bulletin.

FAQ Guidance on Employer Adoption of CARES Act Distribution and Loan Rules

The FAQs make it clear that that employers may, but are not required to, adopt the CARES Act distribution and/or loan rules. The IRS notes in the FAQs that “[a]n employer is permitted to choose whether, and to what extent, to amend its plan to provide for coronavirus-related distributions and/or loans,” and that “an employer may choose to provide for coronavirus-related distributions but choose not to change its plan loan provisions or loan repayment schedules.”

FAQ Guidance on Plan Distributions

The FAQs provide the following additional guidance with respect to coronavirus-related distributions from eligible retirement plans:

  • Other Pension Plans. A coronavirus-related distribution is treated as meeting the distribution restrictions for a section 401(k) plan, section 403(b) plan, or governmental section 457(b) plan, but the CARES Act does not otherwise change the limits on when plan distributions are permitted to be made from employer-sponsored retirement plans (e.g., a distribution from a money purchase pension plan still requires a permissible distributable event).
  • Self-Certification. An administrator of an eligible retirement plan may rely on an individual’s certification regarding his or her status as a qualified individual for purposes of a coronavirus-related distribution, unless the administrator has actual knowledge to the contrary.
  • Allowing Repayments. Repayments of coronavirus-related distributions are to be treated as rollover contributions. If a plan does not allow rollover contributions, the plan is not required to change its terms to accept repayments.

FAQ Guidance on Reporting and Taxation of Distributions

Several of the FAQs address how coronavirus-related distributions are to be treated for tax and reporting purposes, including the following guidance:

  • Designation as Coronavirus-Related Distribution. A qualified individual may designate any eligible distributions of not more than $100,000 in the aggregate as a coronavirus-related distribution, regardless of whether the applicable plan treats the distributions as such.
  • Individual Reporting and Income Inclusion. A qualified individual who receives a coronavirus-related distribution should report the distribution on his or her 2020 federal income tax return and should generally include the distribution in income ratably over the three-year period starting with the year of distribution (i.e., as income on the 2020, 2021, and 2022 tax returns for a 2020 distribution), unless such individual chooses to include the entire distribution in income in the year of distribution.
  • Repayment of Distribution. An individual who receives a coronavirus-related distribution may repay to an eligible retirement plan all or part of the amount distributed within the three years following the date of distribution and no federal income tax will be owed on the amount repaid. The repayment is reportable on Form 8915-E, which form is expected to be available from the IRS before the end of the year. An individual who repays a coronavirus-related distribution in a subsequent year may file amended tax returns for years in which the distribution was included in income to claim a refund of the tax attributable to the portion of the distribution that is repaid.
  • Plan Reporting. Plans and IRAs that make a coronavirus-related distribution must report the distribution on Form 1099-R, even if the distribution is repaid in the same year. The IRS expects to provide future guidance on how to report these distributions.

FAQ Guidance on Expected Future Guidance

The FAQs state that the Treasury Department and IRS expect to release additional guidance on the CARES Act retirement plan distribution and loan provisions in the near future. Such guidance is expected to apply the principles of IRS Notice 2005-92, issued on November 30, 2005, which provided guidance for similar retirement plan distribution and loan access for victims of the Hurricane Katrina disaster.

The FAQs indicate that this future guidance could include an expanded list of factors that may be taken into account to determine whether an individual is a qualified individual as a result of experiencing adverse financial consequences as a result of COVID-19. The Treasury Department and the IRS are currently reviewing comments from the public requesting such an expanded list.

If you have any questions on the foregoing, please feel free to reach out to us or your regular Stroock contact. Stroock’s employee benefits and executive compensation team is closely tracking the response of the Department of Labor, the Department of the Treasury and the IRS to the COVID-19 pandemic and is available to address your employee benefit and compensation concerns.

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For More Information

David C. Olstein

Austin S. Lilling

Abbey L. Keppler

[1] “April Tax Guidance on the CARES Act and Other Relief,” (Stroock Special Bulletin, April 28, 2020).

[2] Qualified Individuals are individuals who are diagnosed (or whose spouse or dependent is diagnosed) with COVID-19 by a CDC-approved test, as well as individuals who experience adverse financial consequences as a result of COVID-19, including as a result of being quarantined, furloughed or laid off, having work hours reduced, being unable to work due to lack of child care or having a business they own or operate close.

 

This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.