- Find out more about IRS FAQs regarding retirement plan distribution and loan relief offered by the CARES Act.
- Learn more options available to employers relating to their plans and distribution and loan relief.
- Learn more about waiving distribution restrictions.
- Find out how the CARES Act changes the tax treatment of distributions.
- Learn more about how employers report COVID-related distributions and how they may treat rollovers.
- Find out the CARES Act affects taxes on repayments.
- Discover what’s next for you if loan repayments are suspended.
The IRS recently issued frequently asked questions (FAQs) about retirement plan distribution and loan relief under the Coronavirus Aid, Relief and Economic Security (CARES) Act. This relief applies to qualified individuals affected by the novel coronavirus (COVID-19) pandemic. It expanded distribution options and favorable tax treatment, increased plan loan limits, and delayed repayment of outstanding plan loans.
The FAQs explain that the IRS plans to release more guidance under Internal Revenue Code Section 2202 “in the near future.” It will apply principles originally set forth in Notice 2005-92. This notice interpreted distribution and loan relief put in place in response to Hurricane Katrina. Meanwhile, Fiducial has highlights of the CARES Act FAQs for you.
Optional distribution and loan relief
Employers may choose whether to amend their plans to provide the Sec. 2202 distribution and loan relief. This relief includes allowing qualified individuals to delay repayment of outstanding plan loans for up to one year. They may also adopt some parts of the relief but not others. For example, they may choose the distribution relief but not the plan loan rules or loan repayment schedules.
Waived distribution restrictions
The CARES Act treats COVID-19-related distributions as meeting certain restrictions ordinarily applicable to 401(k) plans and certain other plans, for example, the requirement that 401(k) plans prohibit the distribution of elective deferrals before specified events. But other distribution limits (for instance, the spousal consent rules) cannot be waived simply because the distribution, if made, could qualify as a COVID-19-related distribution.
Tax treatment of distributions
COVID-19-related distributions are generally taxable, though not subject to the 10% tax on early distributions. You may report them as income ratably over a three-year period, unless the individual reports the full amount as income for 2020. Those who qualify and who receive a distribution that meets the requirement for a qualified distribution may treat the distribution as such on their federal income tax returns, regardless of how an employer or plan reports or characterizes the distribution.
Reporting of distributions
Plans must report COVID-19-related distributions on Form 1099-R, even if the individual repays the distribution in the same year. Later this year, the IRS will provide more information about reporting such distributions.
No obligation to accept repayments
The FAQs affirm that plans generally do not have to accept rollovers of COVID-19-related distributions.
Tax treatment of repayments
The government considers distributions repaid to an eligible retirement plan within three years as rollovers (and, thus, not taxable). An example in the FAQs shows how to handle repayment of a COVID-19-related distribution in 2022 (after one-third of the distribution has been reported as income in each of the two preceding years) for federal income tax purposes. The Katrina notice also provides more examples. Qualified individuals must report repayments on Form 8915-E, which will be issued later this year.
If loan repayments are suspended, payments after the delay must be adjusted to reflect the delay and any interest accrued during the delay.
It’s important for employers to understand how the CARES Act relief and these FAQs affect plan administration and what plan amendments may be required. Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations for help. Ready to book an appointment now? Click here. Know someone who might need our services? We love referrals!
For more small business COVID-19 resources, visit Fiducial’s Coronavirus Update Center to find information on SBA loans, tax updates, the Paycheck Protection Program, paid sick and family leave, and more.