The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March 2020, introduced significant changes to retirement plan rules under Section 2202. These provisions aimed to provide financial relief to individuals and businesses grappling with the economic fallout of the COVID-19 pandemic. This article delves into the key aspects of the Cares Act related to retirement plans and IRAs, offering clarity on distribution options, loan provisions, and more.
CARES Act and Retirement Distributions: Expanded Access and Favorable Tax Treatment
Section 2202 of the CARES Act brought about expanded distribution options for individuals impacted by the coronavirus. Qualified individuals gained access to up to $100,000 from eligible retirement plans, including 401(k)s, 403(b)s, and IRAs, with favorable tax treatments. These coronavirus-related distributions aimed to ease financial burdens during uncertain times.
Who Qualifies for a Coronavirus-Related Distribution?
To be considered a “qualified individual” under the CARES Act for distribution purposes, you must meet at least one of the following criteria:
- Diagnosis of COVID-19: You, your spouse, or a dependent has been diagnosed with SARS-CoV-2 or COVID-19 via a CDC-approved test.
- Financial Hardship due to COVID-19: You experience adverse financial consequences stemming from:
- Quarantine, furlough, layoff, or reduced work hours due to COVID-19.
- Inability to work due to lack of childcare because of COVID-19.
- Business closure or reduced operating hours you own or operate due to COVID-19.
It’s important to note that employers and plan administrators can generally rely on an individual’s self-certification of meeting these conditions, unless they possess contradictory knowledge. However, individuals are responsible for accurately determining their eligibility when filing their federal income tax returns.
Key Features of Coronavirus-Related Distributions
- No 10% Early Withdrawal Penalty: Coronavirus-related distributions are exempt from the usual 10% additional tax for early distributions (before age 59½).
- Taxation Over Three Years: Taxes on these distributions are generally spread out evenly over three years, starting with the year of withdrawal. For instance, a $9,000 distribution in 2020 would result in $3,000 being included in taxable income for 2020, 2021, and 2022. Alternatively, individuals can elect to include the entire distribution in their income for the year of distribution if preferred.
- Recontribution Option: Individuals have the option to repay all or part of a coronavirus-related distribution back into an eligible retirement plan within three years of the distribution date. By doing so, the distribution is treated as if it were repaid via a direct trustee-to-trustee transfer, effectively nullifying the federal income tax liability associated with the repaid amount. Amended tax returns can be filed to reclaim taxes paid on amounts that are subsequently recontributed.
Reporting Coronavirus-Related Distributions
- Individual Reporting: Qualified individuals use Form 8915-E to report coronavirus-related distributions on their federal income tax returns and calculate the taxable portion for each year. This form also facilitates reporting any repayments.
- Plan Reporting: Retirement plans and IRAs are required to report coronavirus-related distributions to qualified individuals using Form 1099-R, even if the distribution is repaid within the same year.
CARES Act Loan Relief: Expanded Limits and Repayment Flexibility
Beyond distributions, the CARES Act also offered temporary relief for retirement plan loans, but this provision does not extend to IRAs.
Enhanced Loan Provisions
- Increased Loan Limits: For loans issued to qualified individuals between March 27, 2020, and September 22, 2020, the CARES Act allowed for an increased loan limit, up to the lesser of $100,000 (minus any outstanding plan loans) or 100% of the participant’s vested plan benefit. This temporarily relaxed the usual limits on plan loan amounts.
- Delayed Repayment Option: For loans outstanding on or after March 27, 2020, with repayments due between March 27, 2020, and December 31, 2020, plans were permitted to delay these due dates for up to one year. Subsequent payments are then adjusted to account for the delayed period and any accrued interest.
Employer Discretion and Plan Amendments
It’s crucial to understand that adopting the distribution and loan rules of Section 2202 of the CARES Act was optional for employers. Employers could choose whether and to what extent they amended their plans to incorporate these provisions. Some employers might have offered coronavirus-related distributions but not altered their plan loan rules, or vice versa. Even if an employer’s plan did not formally adopt these CARES Act provisions, an individual who met the qualified individual criteria could still treat a distribution as coronavirus-related on their personal tax return if it met the requirements.
CARES Act and Partial Plan Termination: Providing Relief During Workforce Reductions
The CARES Act, alongside subsequent legislation like the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act), also addressed concerns related to partial terminations of qualified retirement plans due to pandemic-related workforce reductions.
Relief from Partial Termination Rules
Section 209 of the Relief Act offered a temporary reprieve from partial termination rules for plan years that included the period between March 13, 2020, and March 31, 2021. A plan was not deemed to have experienced a partial termination during such a plan year if the number of active participants on March 31, 2021, was at least 80% of the number of active participants on March 13, 2020.
This provision aimed to prevent plans from automatically triggering full vesting for all affected employees due to temporary pandemic-related layoffs, provided that the participant levels remained at or above the 80% threshold by March 31, 2021. This relief applied to the entire plan year if any portion of it fell within the specified determination period. The 80% test is based on the count of active participants on these two specific dates, not necessarily the same individuals. This relief was not explicitly limited to COVID-19 related reductions, applying broadly to participant reductions during this period.
Conclusion: Navigating Retirement Plans in Times of Crisis
The CARES Act Section 2202 provided essential financial flexibility for individuals and employers managing retirement plans amidst the COVID-19 pandemic. By understanding the provisions related to coronavirus-related distributions, loan relief, and partial termination rules, both individuals and plan sponsors could navigate these challenging times with greater clarity and access crucial financial support when needed. While these specific CARES Act provisions were primarily in effect during 2020 and early 2021, understanding their mechanics offers valuable insights into how legislation can adapt retirement plan regulations to address national emergencies and provide economic relief.
