IRS Answers Some FAQs on Coronavirus-Related Distributions and Loans
On May 4, 2020, the IRS provided guidance on coronavirus-related distributions (“CRDs”) and coronavirus-related loans and loan payment delays (“CR Loan Provisions”) in the form of FAQs. In those FAQs, the IRS answered a few of the questions that many practitioners, administrators, and employers have been asking:
- Does a spouse’s loss of income trigger eligibility for CRDs or CR Loan Provisions? For now, an individual is not considered a “qualified individual” (an individual eligible for CRDs or CR Loan Provisions) due to adverse financial consequences that are attributable to a spouse’s loss of income due to coronavirus-related quarantine, furlough, layoff, reduced hours, inability to work due to lack of child care, or closing of a spouse’s business or reduced hours of a spouse’s business. (Q&A-3.) The FAQ also notes that Treasury and the IRS may expand the list of factors considered in determining whether an individual is a “qualified individual” in future guidance.
- Are CRDs and CR Loan Provisions optional? Both CRDs and CR Loan Provisions are optional, meaning that a plan need not provide for CRDs, higher loan limits, or delayed loan payments. (Q&A-9.)
- If a plan does not offer CRDs, will participants lose out on favorable CRD treatment? If a participant is otherwise able to take a distribution from a plan, but the plan does not provide for CRDs, the participant is still able to claim beneficial CRD treatment (no 10% additional tax, three-year inclusion in income, and ability to repay) if the participant is a “qualified individual.” (Q&A-9.) Similarly, the CARES Act does not add any distribution events for a defined benefit pension plan, but if the participant is a qualified individual, the beneficial CRD treatment may be available for an otherwise available distribution. (Q&A-9 and Q&A-10.)
- Is a plan required to accept repayments of CRDs? Repayments of CRDs are treated as rollovers, and no plan is required to accept rollovers. (Q&A-12.) Presumably, if a plan accepts all rollovers, it must accept repayments of CRDs.
- Can a plan administrator rely in all cases on a participant’s certification that they are eligible for CRDs or CR Loan Provisions? Although the CARES Act provides that an administrator may rely on an employee’s certification that the requirements to be a qualified individual are met, this reliance is only available if the administrator does not have actual knowledge to the contrary. (Q&A-11.)
The FAQs also mention that the Treasury and IRS will substantially follow the principles in IRS Notice 2005-92 (Katrina-related guidance on similar provisions) in the forthcoming final guidance where the Katrina-related provisions are similar to those of the CARES Act. (Q&A-2.) This should helpful in anticipating tax and information reporting requirements with respect to CRDs and coronavirus-related loans.
Guidance under the CARES Act related to CRDs and CR Loan Provisions is evolving. For the most up-to-date information, please contact Audrey Fenske, Mark Wilkins, Sam Butler, or any member of the Stinson employee benefits group with any questions.