IRS Releases Coronavirus-Related FAQs for Retirement Plans and IRAs – Some Guidance Still Forthcoming

On March 27, Congress enacted the Coronavirus Aid, Relief and Economic Security (CARES) Act, a massive stimulus package in response to the global coronavirus pandemic. Section 2202 of the CARES Act provides certain individuals who are affected by the pandemic – referred to as “qualified individuals” – with special distribution options from 401(k), 403(b) and governmental 457(b) plans and IRAs, and expands permissible retirement plan loans.

On Monday, May 4, the Internal Revenue Service published answers to commonly asked questions regarding section 2202.

In the FAQs, the IRS covers the basics of section 2202, such as what special relief is offered, who is a qualified individual for the special relief, and what constitutes a “coronavirus-related distribution.” While there were no particular surprises in the guidance, the FAQs are nonetheless a user-friendly reference guide for individuals and plan sponsors alike, addressing such topics as the tax implications of coronavirus-related distributions and the option to repay them.

For example, the FAQs confirm that:

  • For federal income tax purposes, an individual can treat any distribution that qualifies as a coronavirus-related distribution as being coronavirus-related, irrespective of whether the employer’s plan treats it as such. For instance, if a plan permits in-service withdrawals at age 59 1/2 and a qualified individual receives such a withdrawal, he or she should be able to repay it within the 3-year period – and this is true regardless of whether the plan treats the withdrawal specifically as a coronavirus-related distribution, or even provides distinctly for coronavirus-related distributions.
  • Offering the expanded distributions and loans provided for under section 2202 is optional for employer-sponsored retirement plans.
  • Section 2202 does not provide for accelerated distributions from pension plans, or an exception to the spousal consent rules for pension plan distributions that are not made in the form of a qualified joint & survivor annuity.
  • While it generally is expected that plans will accept the repayments of coronavirus-related distributions within the three-year period set forth under section 2202 (which will be treated as rollover contributions), they are not necessarily required to do so – g., in the case of a plan that does not accept rollover contributions at all. Of course, these repayments may be made instead to an IRA in such cases.

One of the most important topics addressed in the FAQs is the tax reporting of coronavirus-related distributions (and repayments), from the perspectives of both the plan and the individual. Qualified individuals who are considering a coronavirus-related distribution, and possibly repaying it to preserve the tax deferral on the withdrawn funds, may wish to review those discussions.

Although helpful, the FAQs do not address every question surrounding section 2202. For example, while the IRS confirmed that administrators may rely on an individual’s self-certification for eligibility for a coronavirus-related distribution, it did not address this issue specifically with respect to the expanded loan provisions under section 2202(b). In addition, the IRS confirms that it intends to issue further guidance in the near future, which (among other topics) may include additional factors to be considered when determining if an individual is a “qualified individual” as a result of experiencing “adverse financial consequences” due to the pandemic.

In the meantime, a central theme throughout the FAQs is that the existing and future IRS guidance will apply the principles set forth in Notice 2005-92, which the IRS issued following Hurricane Katrina, and the Katrina Emergency Tax Relief Act of 2005. While all of the specifics under the CARES Act are not yet known, employers and individuals seeking a “preview” of what might be forthcoming may wish to review this prior guidance.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

About Author: Joshua Waldbeser

Joshua Waldbeser counsels retirement plan sponsors, asset managers and funds, and financial services providers on their fiduciary responsibilities under ERISA, and keeps them on course with regulatory compliance matters. Formerly with the Department of Labor (DOL) Employee Benefits Security Administration, Joshua has an insider’s view of the regulatory challenges faced by employers with respect to their own plans, and by insurance companies, investment advisers, broker-dealers, recordkeepers, banks and trust companies with respect to their services to plans and IRAs. He provides practical, business-oriented advice that reflects the interplay between ERISA, securities and other sources of law, and focuses on compliance and risk mitigation. View all posts by

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