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CARES Act: IRS Q&As Address Retirement Plan Distribution and Loan Issues

May 05, 2020

In what is likely the first of several CARES Act–related pieces of retirement plan guidance, the Internal Revenue Service recently posted a set of Q&As addressing certain issues and questions related to distributions and loans related to the coronavirus (COVID-19) pandemic under the CARES Act.

While the Q&As from the Internal Revenue Service (IRS) do not address all of the open issues or provide detailed responses to technical questions, they confirm some prevailing (but not uniform) interpretations of the CARES Act, and also provide plan sponsors and practitioners with insights about how the IRS intends to address certain issues in future guidance.

Here are a few highlights and observations.

Q2: Does the IRS intend to issue guidance on Section 2202 of the CARES Act?

The US Department of the Treasury and the IRS say that they “anticipate releasing guidance in the near future” on the coronavirus-related distributions and loans provisions of Section 2202 of the CARES Act. Moreover, “Treasury Department and the IRS anticipate that the guidance on the CARES Act will apply the principles of Notice 2005-92 to the extent that the provisions of section 2202 of the CARES Act are substantially similar to the provisions of [the Katrina Emergency Tax Relief Act of 2005 (KETRA)] that are addressed in that notice.”

Observations

This is good news that confirms how many plan sponsors, recordkeepers, and practitioners were approaching the implementation of the coronavirus-related distribution and loan provisions in the CARES Act—that is, by looking to the interpretative guidance the IRS issued for KETRA, which contained provisions and features identical (or substantially similar) to those in the CARES Act.

In addition, the CARES Act provisions waiving required minimum distributions (RMDs) for 2020 are similar to RMD waiver provisions in the Worker, Retiree, and Employer Recovery Act of 2008 and the IRS’s guidance in Notice 2009-82. Thus, perhaps some comfort can be taken from the Q&A that the IRS is likely to provide similar guidance on the CARES Act RMD waiver as it did in Notice 2009-82.

Q3: Am I a qualified individual for purposes of Section 2202 of the CARES Act?

For now, an individual will not be eligible for a coronavirus-related distribution or coronavirus-related loan merely because his or her spouse experiences a furlough, job loss, etc. Eligibility that is based on a spouse or dependent is still restricted to the spouse or dependent being diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the Centers for Disease Control and Prevention (CDC). However, the IRS has received and is reviewing comments from the public requesting an expansion of the circumstances under which an individual will be eligible.

Observations

This Q&A confirms a plain reading of the CARES Act that an individual will not be a qualified individual because of a spouse’s furlough or job loss, but also indicates that the IRS has heard the requests for an expanded interpretation of the CARES Act to include these situations. What remains unclear is whether the IRS will provide additional guidance on this point in time to materially benefit participants looking for expanded availability now.

Q8: What plan loan relief is provided under Section 2202 of the CARES Act?

The Q&A provides that if “a loan is outstanding on or after March 27, 2020, and any repayment on the loan is due from March 27, 2020 to December 31, 2020, that due date may be delayed for up to one year” (emphasis added). In addition, the Q&A clarifies that increased loan limits are available for loans made from March 27, 2020 to September 22, 2020.

Observations

This Q&A eliminates uncertainty regarding the diversity of approaches being taken by recordkeepers when it comes to the duration of loan suspensions and, in particular, when suspended payments would resume (e.g., suspending payments through the end of the calendar year only). Although the approach taken by the IRS in the Q&A is consistent with Notice 2005-92, it is nonetheless helpful clarification. And the IRS also provided a helpful and unambiguous end date to the 180-day period during which a coronavirus-related loan (i.e., a loan subject to the higher limits) can be made.

Q9: Is it optional for employers to adopt the distribution and loan rules of Section 2202 of the CARES Act?

The suspension of loans is optional, and an employer can elect to add one type of coronavirus-related change and not another. “It is optional for employers to adopt the distribution and loan rules of section 2202 of the CARES Act. . . . Thus, for example, an employer may choose to provide for coronavirus-related distributions but choose not to change its plan loan provisions or loan repayment schedules.”

Observations

This is a helpful clarification. Not all employers may want to suspend the loan repayments, but the statutory language of the CARES Act suggested it was mandatory. However, the IRS’s KETRA guidance from 2005 interpreted identical statutory language as optional, and the IRS confirms that it will reach the same conclusion under the CARES Act to make loan repayment suspensions optional.

Q10: Does Section 2202 of the CARES Act provide additional distribution rights to participants or otherwise change the rules applicable to plan distributions?

The CARES Act coronavirus-related distribution is treated as satisfying distribution requirements for Section 401(k) plans, Section 403(b) plans, and governmental Section 457(b) plans, but the CARES Act did not otherwise change the rules for when distributions are permitted.

“For example, a pension plan (such as a money purchase pension plan) is not permitted to make a distribution before an otherwise permitted distributable event merely because the distribution, if made, would qualify as a coronavirus-related distribution. Further, a pension plan is not permitted to make a distribution under a distribution form that is not a qualified joint and survivor annuity without spousal consent merely because the distribution, if made, could be treated as a coronavirus-related distribution.”

Observations

There is nothing too surprising here, but the IRS is confirming that defined benefit plans, money purchase pension plans, and similar plans cannot allow an in-service distribution under the CARES Act unless there is something in the law that already permits it (such as an age 59½ in-service distribution).

Q11: May an administrator rely on an individual’s certification that the individual is eligible to receive a coronavirus-related distribution?

The plan administrator may rely on an individual’s certification of eligibility for a coronavirus-related distribution, “unless the administrator has actual knowledge to the contrary.”

Observations

Again, nothing too surprising here, but it is a helpful confirmation that plan administrators are not required to independently confirm or investigate an individual’s eligibility for a coronavirus-related distribution.

Q12: Is an eligible retirement plan required to accept repayment of a participant’s coronavirus-related distribution?

It is “anticipated” that plans will accept repayments of coronavirus-related distributions, but a plan is not required to change its terms or procedures to accept repayments.

Observations

This is also good news for plans that may not want to establish administrative procedures or processes to accept repayment (e.g., plans that currently do not accept rollover contributions).

Q14: How do plans and IRAs report coronavirus-related distributions?

The coronavirus-related distribution is reported on Form 1099-R, even if the distribution is repaid during the same year. The IRS expects to provide more information on the reporting of distributions later this year.

Observations

This is not surprising, as every distribution and rollover need to be reported. However, it is welcome news for recordkeepers and other providers that are working through the myriad technical issues related to the administration and reporting of distributions.

While there is nothing especially surprising in these Q&As, they are helpful clarifications and confirm that the IRS intends to approach future CARES Act guidance in a way that will not deviate substantially from the guidance it has issued under similar circumstances in the past.

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Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

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Michelle McCarthy

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Craig Bitman
Mary (Handy) Hevener

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Robert Abramowitz
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Rosina Barker
Althea Day
Steven Johnson
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Jonathan Zimmerman