The third COVID-19 Stimulus package has provisions regarding retirement plans, including expanded and penalty-free withdrawal rights, expanded loan rights, extended rights to repay loans and withdrawals, and the deferral of mandatory distributions. New guidance released on May 4, 2020, states that the IRS will be issuing more detailed guidance in the near future. To the extent that the tax-favored 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, are substantially similar to the CARES Act provisions, the future IRS guidance will apply the provisions used in IRS Notice 2005-92 (PDF), issued on November 30, 2005.
The 10% early distribution penalty from retirement plans and IRAs under Section 72(t) of the Internal Revenue Code will not apply to “coronavirus-related distributions” up to $100,000 per person from the person’s retirement plan accounts. The amount distributed may be recontributed to the distributing retirement plan, or to another plan, within three years after the date the distribution is received, without regard to any plan limit on contributions. If the individual does not recontribute the distribution within that period, taxation on the distribution may be spread over a three-year period. The recent guidance provides that one-third of the amount of the distribution is to be reported as taxable income in each of three years, beginning with 2020. Alternatively, the entire amount may be reported, and taxes paid, with the 2020 return.
If an individual recontributes the amount after reporting some or all of the distribution in income for 2020 and/or 2021, the individual is generally instructed to file an amended return to reclaim the taxes paid for the prior one or two years. However, the reference in the guidance to Notice 2005-92 indicates that a repayment after the tax return due date for the year of the distribution may produce additional options with respect to partial recontributions. For example, if the coronavirus-related distribution is $90,000 in 2020, of which $30,000 is included in income for 2020 and $45,000 is recontributed in December 2021, the individual will report zero income for 2021, but has a choice as to whether to use the remaining $15,000 recontribution to reduce the amount included in income to $15,000 for 2020 (by filing an amended return) or 2022.
If a distribution is treated as a coronavirus distribution by an employer plan or IRA, federal income tax withholding is not required, and a direct rollover need not be offered. However, because participants may not be accustomed to dealing with estimated taxes, it would be helpful for the employer to offer voluntary withholding from the distribution. Note that the plan or IRA must report the coronavirus-related distribution on Form 1099-R. This is true even if the amount is recontributed before the end of the plan year in which the distribution is made.
A coronavirus-related distribution may be taken at any time in calendar year 2020 by a “qualified individual,” meaning a plan participant (i) who is diagnosed with COVID-19 by a CDC-approved test; (ii) whose spouse or dependent is diagnosed with COVID-19 by a CDC-approved test; (iii) who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19; (iv) who is unable to work due to COVID-19 child care issues; (v) who has closed or reduced hours in a business owned or operated by the individual due to COVID-19; or (vi) who has experienced other factors as determined by the Secretary of the Treasury. The Secretary of the Treasury and the IRS have sought, and are reviewing, input as to any other factors it should designate.
The administrator of the plan may rely, so long as the administrator has no information to the contrary, on the individual’s certification that the individual qualifies for a coronavirus-related distribution under these categories. However, if an individual obtains a distribution by means of a false certification and the plan administrator does not realize that it is false, the plan administrator may be protected and the plan will not be disqualified, but the individual will not be entitled to treat the distribution as a coronavirus-related distribution if the individual is not a qualified individual.
Loans from Qualified Plans
The $50,000 limit on plan loans is increased to $100,000 for loans from qualified plans to qualified individuals (as defined above) made during the 180-day period from March 27, 2020, through September 22, 2020. In addition, the cap on plan loans of 50% of the present value of the borrower’s vested benefit is increased to 100%.
The due date for any repayment by a qualified individual of a participant loan that would occur from March 27 through December 31, 2020, is delayed for up to one year. Later repayments for such a loan are also adjusted “appropriately” to reflect the prior delayed due date “and any interest accruing during such delay.” The delay period is ignored in determining the five-year maximum period for a plan loan.
A plan may be amended to provide for the above expanded distribution and loan options. Plan amendments for both the coronavirus-related distribution and plan loan provisions need not be made until the end of the first plan year beginning on or after January 1, 2022. The due date for amendments to governmental plans is two years later.
It is up to the employer to determine whether any plan changes will be made regarding the coronavirus-related distribution and/or loan provisions. Regardless of whether the employer makes any plan changes, however, a qualified individual who is entitled to a distribution under the terms of the plan may take advantage of the coronavirus-related distribution options by reporting a distribution ratably over three years or by recontributing it during the three-year period.
Certain plan provisions can be adopted by an employer to facilitate coronavirus-related distributions. For example, 401(k) plans and 403(b) plans can be amended to make coronavirus-related in-service distributions from sources not otherwise payable before age 59½ if the employer so chooses. However, a plan of a type not allowed to make in-service distributions cannot do so just because of the CARES Act provisions. For example, money purchase pension plans generally cannot make in-service distributions before age 59½ (although such a plan could provide for in-service distributions after that age). Also, a pension plan that requires distributions to take the form of a qualified joint and survivor annuity in the absence of spousal consent cannot make a coronavirus-related distribution in the absence of spousal consent.
Minimum Required Distributions
Minimum distributions otherwise required in 2020 from defined contribution plans need not be made. Minimum distributions with a required beginning date in calendar year 2020, which have not yet been made by January 1, 2020, need not be made in 2020. This waiver is applicable to (i) defined contribution 401(a) qualified plans; (ii) defined contribution 403(a) and 403(b) plans; (iii) governmental defined contribution 457(b) plans; and (iv) individual retirement accounts. If this provision is treated in the same manner as the analogous 2009 relief, the plan sponsor may have discretion as to whether it should be adopted.
Plan amendments for these provisions are not required until the end of the 2022 plan year (the 2024 plan year for governmental plans).
Defined Benefit Plan Funding Requirements
Single employer defined benefit plan funding requirements for 2020, including quarterly contributions, may be deferred until January 1, 2021, at which time they must be paid with interest. In determining the application of benefit restrictions in plan years containing the 2020 calendar year, a plan sponsor may elect to use the plan’s 2019 funded status.