IRS Explains CARES Act Retirement Plan Loan and Distributions Provisions

IRS Explains CARES Act Retirement Plan Loan and Distributions Provisions

May 20, 2020

Section 2202 of the CARES Act includes certain provisions relating to COVID-19 distributions from defined contribution plans (including 403(b) programs), and COVID-19 related loans. In Informal Guidance, the IRS has confirmed that it is optional to include these provisions in your plan. See, Coronavirus-related relief for retirement plans and IRAs questions and answers.

Some plan administrators and plan investment committees have adopted a paternalistic approach to protect plan participants and have not added these provisions to their plans due to the volatility of the marketplace. The guidance references IRS Notice 2005-92, which provided relief in connection with Hurricane Katrina. However, even if a plan doesn’t add the new distribution provisions, this will not prevent a participant from claiming a distribution was COVID-19 related if the participant is a “qualified individual.”  See: IRS Notice 2005-92, Section 4A.

The term “qualified individual” is defined as follows:

  • Participant is 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;
  • Participant’s  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;
  • Participant experiences 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;
  • Participant experiences 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
  • Participant experiences 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.

Coronavirus-related distributions have the following benefits:

  • The 10% additional tax on early distributions does not apply for those under age 59 1/2;
  • Taxation of the distribution can be spread ratably over a three-year period; and
  • The participant may repay the distribution to the plan within three years (if the plan accepts rollover contributions).

In addition, if a “qualified individual” has an outstanding plan loan, you can work with your recordkeeper to permit the suspension of loan payments that are due between March 27 and December 31, 2020 to avoid a loan default and deemed distribution. Loan payments due during that period of time that are not paid can be re-amortized, with accrued interest, and loan payments started January 1, 2021, even though the loan term will extend beyond the maximum five-year period. Plan administrators can also rely on the general tax deadline extension in Notice 2020-23, which permits the suspension of loan payments due between April 1, 2020 through July 14, 2020 for a year.

If you have any questions about this post, please contact your regular Saul Ewing Arnstein & Lehr LLP Tax & Employee Benefits attorney.

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