Loans and Distributions Under the CARES Act

The Coronavirus, Aid, Relief and Economic Security (CARES) Act was enacted on March 27. But there are always questions—and often fine-tuning to be done—after a new law is put on the books. The CARES Act is no exception, and an Oct. 7 ASPPA webcast answered questions concerning loans and distributions under the CARES Act.

In “Just the FAQs About Distributions,” Bob Kaplan and Robert M. Richter examined selected provisions of the CARES Act in Q&A format. Kaplan and Richter are the American Retirement Association’s Director of Technical Education and Retirement Education Counsel, respectively.

The CARES Act includes provisions to ease retirement plan hardship and loan rules to free up funds for individuals affected by the pandemic, provide relief from the required minimum distribution (RMD) rules and add funding relief for single-employer defined benefit plans. And the IRS has issued guidance relevant to retirement plans in the wake of the CARES Act enactment in Notice 2020-50 and Notice 2020-51.

Participant Loans

Q: What is time frame in which a COVID-19 loan could have been taken? 

A: Here are some of the COVID-19 participant loan rules:

• Could have been taken between March 27 and Sept. 22.
• It is not mandatory that a plan make participant loans available under the CARES Act.
• Increases the 50%/$50,000 limits to 100%/$100,000. 
• A loan may be in addition to a COVID-19 distribution.
• Allowed for terminees IF the plan provisions provide that they can receive a loan. 
• A loan cannot be made from an IRA, a SEP or a SIMPLE IRA.

Repayments

Q: What happens to loan repayments during 2020? 

A: Loan repayments are allowed to be delayed for up to one year (if the plan adopts this provision). “Work with whomever is administering the law,” said Kaplan, adding, “it’s not just a one-brush-paints-everything prospect.” 

Q: Does this rule replace the Tax Cuts and Jobs Act (TCJA) provision that allows a rollover of a loan offset up to the due date of the filing of the tax return? 

A: No, that rule is still applicable, but only to a participant who have a severance of employment or is in a plan that terminates.

Q: How long is the window to repay a COVID-19 distribution? 

A: Three years from the date of the distribution. The distribution may be paid into another eligible retirement vehicle. The participant may have to file an amended return.
 

Q: How does the receiving plan handle the repayment?
 

A: It is treated as if were a direct rollover. 
 

Q: Are the repayments reported on the individual’s Form 1040 tax return? 
 

A: Yes, on line 4d and a Form 8915-E must be attached to the filing.
 

Q: How does the repayment work when the individual elects to include the entire distribution as taxable? 
 

A: If the recontribution before the tax filing, including extensions, for 2020, then no portion is treated as income for 2020.

Loan Delays

Q: If a loan is delayed, will interest accrue during the time of the suspension of payments? 

A: Yes, and the loan will have to re-amortized. The safe harbor method is to calculate the interest until Dec. 31, 2020 then resume loan repayments at the new amortized rate, completing the last payment no later than six years from the date of the original loan (five years plus the one-year delay). “When there is not a repayment, the interest is not forgiven,” remarked Kaplan. 

Qualified Individual

Q: Who is a qualified individual? 

A: A qualified individual is anyone who: 

• is diagnosed with the virus (via test approved by CDC);
• whose spouse or dependent is diagnosed with virus;
• suffers, or whose spouse or member of household, experiences adverse financial consequences as a result of: 
  • quarantine
  • furlough
  • being laid off
  • has work hours reduced
  • is unable to work due to child care 
  • experiences the effect if business closure
  • has a reduction in pay or self-employment income 
  • has a job offer rescinded
  • experiences the effect of other factors as determined by the Secretary of the Treasury 
• A plan sponsor can rely on the certification of the individual that they are “qualified.” Kaplan remarked that this is the “most significant” provision concerning qualified individuals.

The law was written when the expectations was that the quarantine and associated changes would be short-term, Kaplan noted, adding that the list of those who are qualified individuals could be expanded. 

This provision, said Kaplan, “is one of the most generous, if not the most generous” in this regard in the law. And, he added, another nice feature is that “boxes don’t have to be checked” and it does not take a lot of information in order to be a qualified individual. 

Distribution Amounts

Q: Is there a limit to the distribution amount? 

A: The rules specify that distributions: 

• can be made up to $100,000, but the employer may select a lower amount;
• must be made before Dec. 31, 2020;
• may be limited by the employer regarding sources (although most likely will not do so); 
• can be in multiple distributions; and
• the rules apply to defined contribution plans (including ESOPs) but NOT to DB plans.

Required Minimum Distributions

Q: Does the waiver on the 2020 RMD apply to cash balance plans? 

A: No, it only applies to DC plans, 403(b) arrangements and IRAs (including inherited IRAs). It does not apply to any type of DB plan (including a 414(k) account within a DB plan).

Q: Under the RMD waiver provided in IRS Notice 2020-51, if a 60-day rollover was utilized in the last 12 months and the 2020 RMD was taken, could I still have rolled it back within 60 days (including extensions)? 

A: Yes, but the rollover of the 2020 distribution must have been made by Aug. 31, 2020. 

Q: Under the RMD waiver provided in IRS Notice 2020-51, if a participant took an RMD earlier in the year and is outside the 60-day rollover window, could it be treated as a COVID-19 distribution and therefore be repaid within three years? 

A: Yes, but this would only be an option if the participant is a qualified individual. The IRS provided an extension of the 60-day rollover requirement to accommodate the retroactive effective date of the CARES Act provision in Notice 2020-51. The new deadline for all 2020 distributions was Aug. 31, 2020.

Tax Treatment

Q: Is the distribution taxed? 

A: Yes, as ordinary income (except for Roth deferral or after-tax amounts); however, note that:

• the 10% additional tax for those under age 59½ does not apply;
• the distribution may be included as taxable in 2020 or have one-third taxable in each of the years 2020, 2021 and 2022; and 
• if the individual dies before the three-year period, then the remaining amount is includable for the tax filing for the year of death.

Terminated Participants 

Q: May a terminated participant request a COVID-19 distribution? 

A: Yes.

COVID-Related Distributions

Q: Does the plan have to adopt the provision in order for a participant to treat a distribution as a COVID-19 distribution for tax purposes? 

A: No, a qualified individual may treat any distribution as a COVID-19 distribution, including hardship withdrawals

Defaulted Loans

Q: May a defaulted loan be treated as a COVID-19 distribution?

A: Yes. 

IRA Owners

Q: If an IRA owner is taking substantially equal payments (avoids 10% tax) can they take an additional amount? 

A: Yes.

Reporting

Q: How is a COVID-19 distribution reported? 

A: Use Form 1099-R with either Code 1 – Early distribution no known exception, or Code 2 – Early distribution exception. Proper tax handling is up to the individual. 

Withholding

Q: Is the withholding for these distributions 20%? 

A: The treatment of these distributions is that they are not eligible for rollover, therefore the mandatory 20% withholding does not apply. 

402(f) Notice

Q: Will the 402(f) notice be updated? 

A: It is not required, but service providers will most likely create disclosures for plan sponsors to use.