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On May 4, 2020, the IRS posted FAQs giving details about the new special rules for retirement plans and IRAs enacted in Section 2202 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which allows withdrawals from eligible retirement plans and IRAs without some of the usual taxes for qualified individuals affected by the COVID-19 pandemic.

Specifically, CARES Act Section 2202 allows up to $100,000 of coronavirus-related distributions and rollovers from eligible retirement plans (such as 401(k) and 403(b) plans, and IRAs) to qualified individuals without the 10% early withdrawal tax under IRC Section 72(t). It also increases the amount of plan loans qualified individuals may borrow to $100,000 and gives them up to an additional year over the usual five years for repayment.

The IRS said in the FAQs that it anticipates releasing guidance on CARES Act Section 2202 "in the near future." The guidance will apply the principles of Notice 2005-92, which gave guidance on the tax treatment of plan distributions and loans under the Katrina Emergency Tax Relief Act of 2005 (KETRA).

FAQs

Distributions

CARES Act Section 2202 permits coronavirus-related distributions under the following circumstances:

• An individual (or spouse or dependent) was diagnosed with the COVID-19 disease or virus.
• An individual was quarantined, furloughed, laid off or had work hours reduced due to COVID-19 and experienced adverse financial consequences as a result.
• An individual could not work due to a lack of childcare because of COVID-19 and experienced adverse financial consequences as a result.
• A business owner closed the business or reduced hours due to COVID-19 and experienced adverse financial consequences as a result.

Administrators may allow individuals to self-certify that they qualify for coronavirus-related distributions. The FAQs said the IRS is reviewing requests in public comments to expand the list of factors.

The FAQs clarify that a coronavirus-related distribution is a distribution from an eligible retirement plan to a qualified individual from January 1, 2020, through December 30, 2020, up to an aggregate limit of $100,000 from all plans and IRAs.

CARES Act Section 2202 allows qualified individuals to pay the tax on coronavirus distributions over three years, starting with the year of the distribution. Individuals may choose to repay all or some of the coronavirus-related distributions into an eligible retirement plan (such as an IRA or tax-qualified plan); in that case, the distribution will be treated as though it were repaid in a direct trustee-to-trustee transfer, so no income tax will be owed. If the individual repays the entire distribution after already incurring taxes, the individual can file an amended tax return to obtain a refund. The FAQs clarified this situation with an example:

[If] "you receive a coronavirus-related distribution in 2020, you choose to include the distribution amount in income over a [three]-year period (2020, 2021, and 2022), and you choose to repay the full amount to an eligible retirement plan in 2022, you may file amended federal income tax returns for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution that you included in income for those years, and you will not be required to include any amount in income in 2022."

The FAQs "anticipate," but do not require, that eligible retirement plans will accept repayments of coronavirus-related distributions (which are treated as rollover contributions). For example, if a plan does not accept rollover contributions, the plan is not required to accept the repayments.

Plan loans

For loans made from March 27, 2020 through September 22, 2020, from eligible retirement plans (not including IRAs), Section 2202 of the CARES Act permits employers to increase the maximum loan amount up to the lesser of (1) $100,000 (minus outstanding plan loans of the individual), or (2) the individual's vested benefit under the plan.

Plans may delay repayment for one year for loans outstanding on or after March 27, 2020. This applies to payments due from March 27, 2020 through December 31, 2020. Any payment after this time will be adjusted to reflect the delay, including accrued interest.

Employers not required to adopt new rules

The FAQs clarify that employers are not required to adopt the distribution and loan rules of CARES Act Section 2202. Employers may choose to adopt some, but not all, the provisions and must amend their plans accordingly. If, however, an employer does not treat a distribution as coronavirus-related, a qualified individual may still treat the distribution as such on his or her federal income tax return, as long as it meets the requirements of a coronavirus-related distribution.

Although CARES Act Section 2202 generally does not grant participants additional distribution rights or allow changes in plan distribution rules, the FAQs note, a coronavirus-related distribution will not violate the special distribution restrictions for 401(k), 403(b), or governmental 457(b) plans. Thus, for example, an active employee who is under the age of 59-1/2 may take a coronavirus-related distribution from her elective deferral account in her employer's 401(k) plan if the plan allows it, even though the normal distribution restrictions for 401(k) plans would prohibit the plan from allowing that distribution. For other plans, such as defined benefit plans, the normal distribution rules apply. Thus, for example, "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."

Reporting coronavirus-related distributions

The FAQs require eligible retirement plans to report coronavirus-related distributions to qualified individuals on Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. even if they repay the distribution in the same year. The FAQs say the IRS expects to release more information on how to report these distributions later this year.

Form 8915-E (which is expected to be available in 2020) should be used by individuals to report repayment of a coronavirus-related distribution includible in income for a year.

Implications

The FAQs clarify some important issues for retirement plan administrators, employers and other retirement plan sponsors, IRA custodians, and individuals. Given the statutory similarities, many practitioners have expected the rules under Section 2202 of the CARES Act would be similar to the analogous rules under KETRA. The FAQs confirm that will be the case. Therefore, until additional CARES Act guidance is published, it may be helpful to look to Notice 2005-92 as well as other KETRA resources, such as IRS forms and publications.

The FAQs do not exercise Treasury's authority to identify other factors that might allow for a coronavirus-related distribution, such as a reduction in pay unrelated to a reduction in hours. This authority might still be exercised at a later date.

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