Understanding Employee Benefits

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.

Contact Audrey Fenske, Mark Wilkins or Sam Butler for more information.

Retirement Plans