The IRS is working on guidance on coronavirus-related retirement plan changes that will take its cue from a prior disaster-related notice.
The coming guidance will address provisions from the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), which created a new coronavirus-related distribution option and increased the loan limit for retirement plans.
Similar provisions were enacted in the Katrina Emergency Tax Relief Act (KETRA) of 2005, according to a new IRS FAQ issued May 4. Those provisions resulted in the IRS issuing Notice 2005-92, 2005-2 C.B. 1165.
“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 FAQ said.
Practitioners had speculated about whether the IRS would look to the prior Hurricane Katrina notice in drafting new guidance. Questions arose about how to apply the one-year suspension period for loan repayments and how to re-amortize loans. The CARES Act, signed into law March 27, increased the maximum amount available for a retirement plan loan to $100,000 and provided that loan repayments can be delayed for one year.
The FAQ says that for loans outstanding on or after March 27 with repayments due between March 27 and December 31, “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,” the FAQ said.
Expanding Qualified Individuals Definition
The coronavirus distribution and loan provisions apply to so-called qualified individuals, which includes someone who is diagnosed with COVID-19 or whose spouse or dependent is diagnosed, or someone who has experienced specified adverse financial consequences because of closures caused by the virus. Some practitioners have noted that if an individual has a reduction in salary but not in hours, it doesn’t appear that the person qualifies under the current statutory definition.
The FAQ notes that Treasury and the IRS have the power to expand the list of qualified individuals based on the adverse financial consequences they encounter.
“The Treasury Department and the IRS have received and are reviewing comments from the public requesting that the list of factors be expanded,” the FAQ said.
Pension Plan Limitations
The FAQ also clarifies that pension plans — including money-purchase pension plans — aren’t allowed to make distributions before otherwise being permitted just because the distribution 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,” the FAQ said.
The FAQ addressed several other issues, including repayment of distributions. It noted that retirement plans aren’t generally required to accept rollover contributions and so a plan won’t have to change its procedures to accept repayments if it doesn’t accept rollovers.