Section 2202 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted on March 27, 2020, provides unique distribution options and rollover rules for retirement plans and IRAs and expands permissible loans from specific retirement plans.
- General Information
- Partial Termination of a Qualified Retirement Plan Under Section 209 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020
General Information
Q1. What are the special retirement plans and IRAs rules in section 2202 of the CARES Act?
A1. Section 2202 of the CARES Act general provides for expanded distribution options. Also, favorable tax treatment for up to $100,000 of coronavirus-related distributions from eligible retirement plans (certain employer retirement plans, such as section 401(k) and 403(b) plans, and IRAs) to qualified individuals. Additionally, special rollover rules concerning such distributions. It also increases the amount a qualified individual may borrow from an eligible retirement plan (not including an IRA). Along with permitting a plan sponsor to provide qualified individuals with up to an additional year to repay their plan loans. See the FAQs below for more details.
Q2. Does the IRS intend to issue guidance on section 2202 of the CARES Act?
A2. The Treasury Department and the IRS formulate guidance on section 2202 of the CARES Act. They anticipate releasing that guidance shortly. IRS Notice 2005-92 PDF, issued on November 30, 2005, guided the tax-favored treatment of distributions and plan loans under sections 101 and 103 of the Katrina Emergency Tax Relief Act of 2005 (KETRA). Subsequently, 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.
Q3. Am I a qualified individual for purposes of section 2202 of the CARES Act?
A3. You are a qualified individual if –
- A test approved by the CDC diagnosed you with the virus SARS-CoV-2 or with coronavirus disease 2019;
- A test approved by the CDC diagnosed your spouse or dependent with COVID;
- Quarantine results in adverse financial consequences. For example, being furloughed or laid off, or having work hours reduced, caused by COVID.
- You experience 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
- You experience adverse financial consequences due to closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.
Under section 2202 of the CARES Act, the Treasury Department and the IRS may issue guidance. This guidance considers the list of factors to determine whether an individual is qualified. The public has provided comments to the Treasury Department and the IRS requesting that the list of factors be expanded, and they are currently under review.
Q4. What is a coronavirus-related distribution?
A4. A coronavirus-related distribution is made from an eligible retirement plan to a qualified individual from January 1, 2020, to December 30, 2020. There is an aggregate limit of $100,000 for all plans and IRAs.
Q5. Do I have to pay the 10% additional tax on a coronavirus-related distribution from my retirement plan or IRA?
A5. No, the 10% additional tax on early distributions does not apply to any coronavirus-related distribution.
Q6. When do I have to pay taxes on coronavirus-related distributions?
A6. You generally need to include the distributions in income over three years, starting with the year you receive the distribution. For example, if you received a $9,000 coronavirus-related distribution in 2020, you would report $3,000 in income on your federal income tax return for 2020, 2021, and 2022. However, you can include the entire distribution in your income for the year of the distribution.
Q7. May I repay a coronavirus-related distribution?
A7. You may generally repay all or part of a coronavirus-related distribution to an eligible retirement plan. This is provided that you complete the repayment within three years after receiving the distribution. When you repay a coronavirus-related distribution, it will be treated as if it were repaid in a direct trustee-to-trustee transfer. This is so that you do not owe federal income tax on the distribution.
If, for example, you received a coronavirus-related distribution in 2020, you choose to include the distribution amount in income over three years (2020, 2021, and 2022). Suppose you repay the total amount to an eligible retirement plan in 2022. In that case, you may file amended federal income tax returns for 2020 and 2021. You may then claim a refund of the tax attributable to the distribution amount you included in your income for those years. There is no requirement for you to have any amount in revenue in 2022. See sections 4.D, 4. E, and 4. F of Notice 2005-92 for additional examples.
Q8. What is plan loan relief provided under section 2202 of the CARES Act?
A8. Section 2202 of the CARES Act permits an additional year to repay loans from eligible retirement plans (not including IRAs) and relaxes loan limits.
- Certain loan repayments may be delayed for one year: Say a loan is outstanding on or after March 27, 2020, and any repayment on loan is due from March 27, 2020, to December 31, 2020. That due date may be delayed under the plan for up to one year. Any payments after the suspension period will be adjusted to reflect the delay and any interest accruing during the delay. See section 5.B of Notice 2005-92.
- Loan limit may be increased: Under the CARES Act employers can increase the loan amount available to qualified individuals. For plan loans made to a qualified individual from March 27, 2020, to September 22, 2020, the limit may be increased 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. See section 5.An of Notice 2005-92.
Q9. Is it optional for employers to adopt the distribution and loan rules of section 2202 of the CARES Act?
A9. It is optional for employers to adopt the distribution and loan rules of section 2202 of the CARES Act. An employer can choose whether to amend its plan to provide for coronavirus-related distributions that satisfy the provisions of section 2202 of the CARES Act. Thus, an employer may choose to provide coronavirus-related distributions. Then choose not to change its plan loan provisions or loan repayment schedules. An employer may not consider distribution as coronavirus related. However, a qualified individual can claim such a distribution on their tax return. Although the distribution must meet the requirements to be a coronavirus-related distribution. See section 4.A of Notice 2005-92.
Q10. Does section 2202 of the CARES Act provide additional distribution rights to participants or otherwise change the rules applicable to plan distributions?
A10. Under section 2202 of the CARES Act, a coronavirus-related distribution is treated as meeting the distribution restrictions for a section 401(k) plan, section 403(b) plan, or governmental section 457(b) plan. For example, under section 2202 of the CARES Act, a section 401(k) plan may permit a coronavirus-related distribution. This is allowed even if it would occur before an event such as severance, disability, or attainment of age 59½.
However, the CARES Act does not change the limits on when plan distributions are permitted from employer-sponsored retirement plans. For example, a pension plan (such as a money purchase pension plan) is not permitted to distribute before an otherwise permitted distributable event. This is merely because the distribution if made, would qualify as a coronavirus-related distribution. Further, a pension plan is not permitted to distribute under a form that is not a qualified joint and survivor annuity without spousal consent. This is because the distribution could be treated as a coronavirus-related distribution. See section 2.A of Notice 2005-92.
Q11. May an administrator rely on an individual’s certification that the individual is eligible to receive a coronavirus-related distribution?
A11. An eligible retirement plan administrator may rely on an individual’s certification that the individual satisfies the conditions to be qualified. This is unless the administrator has actual knowledge to the contrary. An administrator may rely on an individual’s certification in making and reporting a distribution. However, to treat the distribution as coronavirus-related distribution for their federal income tax return, the individual must meet the eligibility requirements.
Q12. Is an eligible retirement plan required to accept repayment of a participant’s coronavirus-related distribution?
A12. In general, it is expected that you will be able to repay coronavirus-related distributions to eligible retirement plans. You expect these repayments will be treated as rollover contributions. However, eligible retirement plans are not generally required to accept rollover contributions. For example: if a plan does not accept rollover contributions, it is not required to change its terms to accept repayments.
Q13. How do qualified individuals report coronavirus-related distributions?
A13. If qualified, you may designate any eligible distribution as a coronavirus-related distribution. This is as long as the total amount you designate is not more than $100,000. As noted earlier, a qualified individual may treat a distribution that meets the requirements to be a coronavirus-related distribution, regardless of whether the eligible retirement plan treats the distribution as a coronavirus-related distribution.
You should report a coronavirus-related distribution on your individual federal income tax return for 2020. You must include the taxable portion of the distribution in income rated over the three years – 2020-2022. That is unless you elected to include the entire income in 2020. To report any repayment of a coronavirus-related distribution and to determine the amount of any coronavirus-related distribution includible in income for a year, you would use Form 8915-E, even if you are not required to file a federal income tax return. The form will be available before the end of 2020. See generally section 4 of Notice 2005-92.
Q14. How do plans and IRAs report coronavirus-related distributions?
A14. The eligible retirement plan must report the payment of a coronavirus-related distribution to a qualified individual on Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Even if the qualified individual repays the coronavirus-related distribution in the same year, they must still provide this report. The IRS expects to provide more information on how to report these distributions later this year. See generally section 3 of Notice 2005-92.
Q15. Are employees who participated in a business’s qualified retirement plan, then laid off because of COVID-19 and rehired by the end of 2020, treated as having an employee-initiated severance from employment to determine whether a partial termination of the plan occurred? (added July 30, 2020)
A15. Generally, no. Subject to the facts and circumstances of each case, participating employees generally are not treated as having an employee-initiated severance from employment for calculating the turnover rate used to help determine whether a partial termination has occurred during an applicable period if they’re rehired by the end of that period. This means that if an employee participated in the retirement plan and was terminated due to the COVID-19 pandemic, and they were rehired by the end of 2020, they would generally not be considered to have initiated their own severance from employment for the purpose of determining whether a partial termination of the retirement plan occurred during the 2020 plan year.
See Revenue Ruling 2007-43 for more information on partial terminations. This includes vesting rules, calculating the turnover rate for employee-initiated severances, the presumption that a turnover rate of at least 20 percent during an applicable period results partial termination, and determining the relevant period.
Partial Termination of a Qualified Retirement Plan Under Section 209 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020
Q1. What does Section 209 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act), Division EE of the Consolidated Appropriations Act, 2021, provide regarding the partial termination of a qualified retirement plan? (added April 27, 2021)
A1. Section 209 of the Relief Act states that a plan year will not be treated as having a partial termination (within the meaning of Internal Revenue Code Section 411(d)(3)). This includes the period beginning on March 13, 2020, and ending on March 31, 2021. If the number of active participants covered by the plan on March 31, 2021, is at least 80% of the number of active participants covered by the plan on March 13, 2020.
Q2. Who does the plan cover as an “active participant”? (added April 27, 2021)
A2. When determining the number of active participants covered by a plan on March 13, 2020, and March 31st, 2021, you should use a reasonable, good-faith interpretation of the term “active participant covered by the plan” applied consistently, for purposes of Section 209 of the Relief Act.
Q3. How does Section 209 of the Relief Act apply to a plan year if only part of the plan year falls within the period beginning on March 13, 2020, and ending on March 31, 2021? (added April 27, 2021)
A3. If any part of the plan year falls within the period beginning on March 13, 2020, and ending on March 31, 2021, Section 209 of the Relief Act applies to any partial termination determination for that entire plan year.
For example, if a plan has a calendar year plan, the 80% partial termination test in Section 209 of the Relief Act applies to both the January 1 to December 31, 2020, plan year. Also the January 1 to December 31, 2021, plan year. This is because both plan years include a part of the statutory determination period of March 13, 2020, to March 31, 2021.
Q4. Is the 80% test applied by identifying the pool of active participants covered by a plan on March 31, 2021, and determining whether at least 80% of those same individuals were active participants covered by the plan on March 13, 2020? (added April 27, 2021)
A4. No. You would apply Section 209 of the Relief Act by counting the number of active participants covered by a plan on each date. The number of active participants covered by a plan counted on March 31, 2021, includes all active participants covered by the plan on that date. Regardless of whether the plan covered those individuals on March 13, 2020, this applies to them.
Q5. Does Section 209 of the Relief Act apply solely to reductions in the number of active participants covered by a plan related to the COVID-19 national emergency? (added April 27, 2021)
A5. No. The COVID-19 national emergency was declared on the first day of the statutory determination period- March 13th, 2020. However, the terms of the provision are not limited to reductions related to the COVID-19 national emergency.
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