IRS Issues Q&As on How CARES Act Affects Distributions, Rollovers, Plan Loans

The IRS has provided questions and answers concerning the provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act and how they apply to and affect retirement plans and IRAs.

Specifically, the May 4 Q&As concern Section 2202 of the CARES Act, which provides for special distribution options and rollover rules for retirement plans and IRAs and expands permissible loans from certain retirement plans.

In general, the IRS notes, Section 2202 of the CARES Act provides for:

• expanded distribution options;
• favorable tax treatment for up to $100,000 of coronavirus-related distributions from eligible retirement plans—certain employer retirement plans, such as 401(k)s, 403(b)s and IRAs—to qualified individuals;
• special rollover rules concerning such distributions;
• increased limits on the amount a qualified individual may borrow from an eligible retirement plan other than an IRA; and
• the ability of a plan sponsor to provide qualified individuals up to an additional year to repay their plan loans.

The Q&As note that qualified individuals under Section 2202 of the CARES Act include those who:

• are diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;
• have a spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;
• experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;
• experience adverse financial consequences as a result of being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or
• experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.

The IRS also notes that under Section 2202 of the CARES Act, it and the Treasury Department may expand the factors taken into account to determine whether an individual is a qualified individual as a result of experiencing adverse financial consequences. The IRS adds that they have received, and are reviewing, comments requesting that they do so.

The Q&A also address:

• how taxes on the COVID distributions can be paid (all at once in the year of distribution or ratably over a three-year period);
• how the repayment of those distributions can be done to recover taxes paid/withheld (amended tax returns for the years in question) and to use Form 8915-E (which is expected to be available before the end of 2020) to report any repayment of a coronavirus-related distribution and to determine the amount of any coronavirus-related distribution includible in income for a year;  
• what a coronavirus-related distribution is;
• whether one must pay the 10% additional tax on a coronavirus-related distribution from a retirement plan or IRA;
• when one must pay taxes on coronavirus-related distributions;
• whether one may repay a coronavirus-related distribution;
• what plan loan relief is provided under section 2202 of the CARES Act?
• whether it is optional for employers to adopt the distribution and loan rules of Section 2202 of the CARES Act;
• whether Section 2202 of the CARES Act provide additional distribution rights to participants or otherwise change the rules applicable to plan distributions; 
• whether an administrator may rely on an individual’s certification that the individual is eligible to receive a coronavirus-related distribution;    
• whether an eligible retirement plan is required to accept repayment of a participant's coronavirus-related distribution;
• how qualified individuals report coronavirus-related distributions; and
• how plans and IRAs report coronavirus-related distributions.

And the Q&A confirm that:

• the adoption of COVID distribution and loan provisions is optional at the discretion of the employer;
• the last day to obtain a COVID-19 loan with the increased limits is Sept. 22, 2020 (instead of Sept. 23, 2020); and
• while it is anticipated that plans will accept COVID distribution repayments, plans that do not accept rollovers will not be forced to change terms or procedures to accept these repayments.

Further, the Q&A clarify:

• that the COVID distributions cannot be made from pension plans (including money purchase pension plans) any sooner than permitted under the pension plan rules; and
• that a qualified individual may treat a distribution that meets the requirements to be a coronavirus-related distribution as such—REGARDLESS of whether the eligible retirement plan treats the distribution as a coronavirus-related distribution.

Future Guidance

The IRS says that it and the Treasury Department are formulating guidance on Section 2202 and expect to release it “in the near future.” It also indicates that they are looking to the example of what was done in the wake of Hurricane Katrina in 2005.

The IRS cites Notice 2005-92, which it issued on Nov. 30, 2005 and which provided guidance on the tax treatment of distributions and plan loans under Sections 101 and 103 of the Katrina Emergency Tax Relief Act of 2005 (KETRA) as those provisions applied to victims of Hurricane Katrina. It says that it and the Treasury Department expect the guidance on the CARES Act will apply the principles of the earlier Notice to the extent Section 2202 of the CARES Act are “substantially similar” to the provisions of KETRA that Notice 2005-92 addressed.