IRS Offers Some Clarifications About CARES Act Retirement Plan Provisions

The guidance explains how repayment of coronavirus-related distributions works and whether plan sponsors are required to accept them, among other things.

Section 2202 of the Coronavirus Aid, Relief and Economic Security (CARES) Act, enacted on March 27, provides for special distribution options and rollover rules for retirement plans and individual retirement accounts (IRAs) and expands permissible loans from certain retirement plans.

A new Q&A document from the IRS clears up some questions stakeholders may have about the CARES Act provisions. The agency says the Treasury Department and the IRS are formulating guidance on Section 2202 of the CARES Act and anticipate releasing that guidance in the near future. It points to IRS Notice 2005-92, issued on November 30, 2005, that provided guidance on the tax-favored treatment of distributions and plan loans under Sections 101 and 103 of the Katrina Emergency Tax Relief Act of 2005 (KETRA) as those provisions applied to victims of Hurricane Katrina. The Treasury Department and the IRS anticipate that the guidance on the CARES Act will apply the principles of Notice 2005-92 to the extent the provisions of Section 2202 of the CARES Act are substantially similar to the provisions of KETRA that are addressed in that notice.

The current guidance explains what a coronavirus-related distribution is and describes relief for participant loans provided under the CARES Act. It also lists who is a qualified individual for purposes of Section 2202.

The guidance explains how retirement plan participants may spread payment of taxes for coronavirus-related distributions (CRDs) over a three-year period. “For example, if you receive a $9,000 coronavirus-related distribution in 2020, you would report $3,000 in income on your federal income tax return for each of 2020, 2021 and 2022. However, you have the option of including the entire distribution in your income for the year of the distribution,” it says.

Participants may repay all or part of the amount of a coronavirus-related distribution to an eligible retirement plan, provided that they complete the repayment within three years after the date that the distribution was received. If, for example, they receive a coronavirus-related distribution in 2020, they choose to include the distribution amount in income over a 3-year period (2020, 2021 and 2022), and they choose to repay the full amount to an eligible retirement plan in 2022, they 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 they included in income for those years, and they will not be required to include any amount in income in 2022.

The IRS says it is anticipated that eligible retirement plans will accept repayments of coronavirus-related distributions, which are to be treated as rollover contributions. However, it notes that eligible retirement plans generally are not required to accept rollover contributions. If a plan does not accept any rollover contributions, the plan is not required to change its terms or procedures to accept repayments.

Additional guidance is found in the Q&A.