The IRS’ posting earlier this week of new question-and-answer (Q&A) guidance on the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020, was welcomed by those who administer retirement savings arrangements. The guidance provides some additional details on the IRA and retirement plan relief provided by the CARES Act.
The CARES Act is intended to aid those affected by the coronavirus (COVID-19) pandemic, which has affected the health and economic welfare—or both—of many Americans. It offers special retirement account distribution, loan access, tax treatment, and repayment options, as well as penalty tax relief. The CARES Act resembles, in most respects, legislation enacted in prior years to aid victims of hurricanes and other major disasters.
The new IRS Q&A-format guidance summarizes the special relief granted to IRA owners and retirement plan participants and, in some cases, provides new and clarifying information on dimensions of the relief. The following is a summary of the content of each Q&A, in numeric order.
- The relief includes expanded distribution options and favorable tax treatment for up to $100,000 (in aggregate) distributed from IRAs and employer-sponsored retirement plans. This includes exemption from the 10 percent early distribution penalty tax, ratable taxation over three years (unless electing current-year taxation), and a three-year period for repayment to an IRA or employer plan.
- This Q&A promises additional CARES Act guidance “in the near future.” This is welcome news because the CARES Act is similar, but not identical to, previous disaster relief legislation and previous IRS disaster guidance (Notice 2005-92, issued following Hurricane Katrina) is being looked to as an indication of how CARES Act-specific guidance may look. The IRS has further promised that CARES Act guidance will apply the principles of Notice 2005-92 to the extent that the CARES Act and the post-Hurricane Katrina legislation’s provisions align.
- Coronavirus-related distributions (CRDs) are IRA or employer plan distributions taken by qualified individuals. These are persons who have (or whose spouse or dependent has) been diagnosed with COVID-19, have been quarantined due to the COVID-19 pandemic, or have experienced adverse financial consequences such as job loss, reduction in work hours, or furlough; including being unable to work due to loss of child care. The IRS in this guidance has indicated that it is reviewing comments submitted and may expand the circumstances that qualify as adverse financial consequences.
- A CRD is defined as a distribution from an eligible employer retirement plan or IRA that is withdrawn by a qualified individual—as described above—from January 1, 2020, to December 30, 2020, in an aggregate amount not to exceed $100,000. It is of some concern that this unusual date could lead to end-of-year errors; the IRS is apparently unwilling to interpret the CARES Act to include December 31.
- This Q&A confirms that CRDs are exempt from the 10 percent additional tax on early distributions from tax-advantaged retirement arrangements to which they apply.
- Taxable amounts withdrawn as CRDs will be taxed ratably (equally) in one-third amounts in tax years 2020, 2021, and 2022, unless the taxpayer receiving them elects when filing 2020 taxes to have the CRDs taxed entirely in 2020.
- In common with legislation responding to several previous disaster events—including Hurricane Katrina in 2005—the distributions known as CRDs can be repaid to eligible retirement plans, including IRAs and eligible employer-sponsored plans. This must occur no later than three years after the date of the distribution(s). A repayment will be “treated as though it were repaid in a direct trustee-to-trustee transfer” within 60 days to preserve prior pretax character. Pretax status would be restored by a taxpayer amending his or her tax return for any prior year in which the distribution was included in income and taxed. This Q&A notes that IRS Hurricane Katrina Notice 2005-92 provides examples of this tax recovery procedure.
- For retirement plan loans that are outstanding on the date of CARES Act enactment (March 27, 2020), any payment due from March 27 to December 31, 2020, may be delayed for one year, with payments after the one-year suspension period adjusted for accrued interest. Employers may allow participants to take loans of up to 100% of their accrued vested balance (normally 50%) to a maximum of $100,000 (normally $50,000). The new guidance confirms that the final date for a participant to secure a CARES Act enhanced retirement plan loan is September 22, not September 23 as most had believed.
- Employers may choose to add CRDs as a distributable event for anyone CRD-eligible, regardless of age or other eligibility—and regardless of whether they will allow plan loans in the legislation-enhanced amounts. CRDs and enhanced plan loans are not linked, and an employer may elect to adopt one, both, or neither. Similarly, the increased loan limits and loan suspension period are independent of one another as options for the employer. Even if an employer does not adopt CRD distribution provisions, a taxpayer who meets a CARES Act COVID-19 diagnosis or economic harm condition for CRD eligibility—and has another distributable event under the plan—may claim the 10 percent penalty exemption, ratable taxation, and repayment privileges associated with CRDs.
- Employers that sponsor a defined benefit pension plan or money purchase pension plan may not choose to add CRDs as a distributable event. Furthermore, the qualified joint-and-survivor-annuity (QJSA) and spousal consent requirements of these plans continue to apply, including for any eligible distribution to a participant who meet CARES Act CRD conditions.
- A retirement plan administrator may rely on the participant‘s representations that he or she satisfies the criteria to be eligible for a CRD. CARES Act statutes do not mention employer “actual knowledge” as a reason to deny a CRD distribution over the representations of a participant. However, both the new IRS Q&As and Notice 2005-92—the Hurricane Katrina guidance—state that a CRD is not to be granted based on participant representations if an employer has actual knowledge to the contrary. While an employer may report a distribution as a CRD based on a participant’s representations, this reporting does not entitle the participant to claim CARES Act tax benefits if he or she is not truly eligible.
- An eligible retirement plan is permitted to accept timely CRD repayments if it accepts rollovers. These repayments are, in fact, rollover contributions, and would be placed in a rollover account, thus, eliminating any question about whether they must be assigned to another contribution source. A plan is not required to amend its provisions to accept CRD repayments. It is not clear from this Q&A whether a plan that accepts rollovers generally can exclude participant CRD repayments. Hopefully the IRS-promised additional guidance will clarify this.
- Qualified individuals will report CRDs when they file their individual income tax return. In addition to the 1040 series return itself, the taxpayer will file new Form 8915-E (the 8915 series reports certain disaster-related tax events) to determine the amount of any CRD included in income for the year, and to report CRD repayments.
- The retirement plan or IRA administrator will report the distribution itself on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc. In this Q&A the IRS promises more information on how to report CRDs “later this year.”