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Client Alert-COVID-19 – ELIGIBILITY REQUIREMENTS FOR DISTRIBUTIONS FROM RETIREMENT PLANS OF UP TO $100,000, INCREASED PARTICIPANT PLAN LOAN AMOUNTS AND DELAYS OF LOAN REPAYMENTS

Apr 09, 2020
  • FisherBroyles News

RETIREMENT PLAN DISTRIBUTIONS

The CARES Act (the “Act”) creates a means by which a coronavirus-related distribution or distributions from a tax-qualified retirement plan may be permissibly withdrawn in a tax-advantaged way. This applies to distributions on or after January 1, 2020, and before December 31, 2020, for individuals affected in certain ways by SARS-CoV-2 (the “Virus”) or the coronavirus disease 2019 (“COVID 19”).

The distribution may be up to $100,000. Unless the individual elects otherwise, the amount will be included in gross income ratably over the three taxable years beginning with 2020. If the distribution is made from pre-tax deferrals and earnings, they will be deemed to satisfy the distribution restrictions, which is essentially reaching age 59½. In light of this, the distribution will not be subject to a 10% excise tax or 20% withholding.

Applicable Retirement Plans

Employers may allow distributions from 401(k) plans, profit sharing plans, 403(b) plans and governmental

457(b) plans. There appears to be confusion about the application of this rule to money purchase pension plans and defined benefit pension plans.

The Act broadly provides that “a plan shall not be treated as violating any requirement of the Internal Revenue Code of 1986 merely because the plan treats such distribution as a coronavirus-related distribution.” The Act does not address issues such as spousal consent to a distribution other than a qualified joint and survivor annuity if that rule is applicable. Until the IRS or Treasury provide guidance, a cautious plan sponsor should apply ordinary election rules in addition to obtaining the individual’s written certification.

For purposes of the distribution limit, all tax-qualified plans sponsored by all employers in the employer’s controlled group are aggregated. For example, if $50,000 is distributed from an employer’s 401(k) plan, only $50,000 of a participant’s interest in any other plans sponsored by members of the employer’s controlled group will be eligible as a coronavirus-related distribution.

Eligible Individuals

An individual is eligible if he or she:

1)         is, or his or her spouse or dependent is, diagnosed with the Virus or COVID-19 by a test approved by the Centers for Disease Control and Prevention; or

2)         experienced adverse financial consequences as a result of being quarantined, being furloughed, laid off or subject to a reduction in working hours due to the Virus or COVID-19, being unable to work due to lack of child care because of the Virus or COVID-19, closing or reducing hours of a business owned or operated by such individual due to the Virus or COVID-19 or other factors as determined by the Secretary of the Treasury.

Employee Certifications

Plan administrators may rely on an employee’s certification that the employee satisfies 1) or 2) above to determine whether someone is an eligible individual. Cautious plan administrators will almost certainly ask to see evidence of a diagnosis of the Virus or COVID-19. Given the lack of widespread testing in the U.S., individuals seeking to rely on 1) above may be forced to wait for this form of relief.

Federal Income Taxation of Distributions

Unless the individual elects to recognize the entire distribution into income for 2020, the amount will be included in gross income ratably over the three taxable years beginning in the year in which the distribution occurs. Pending the issuance of guidance from Treasury and the IRS, care should be taken to treat more than one distribution the same for purposes of including the amount distributed in individual’s Federal income tax.

Generally, distributions of elective deferrals (including earnings) cannot be made until one of the following occurs.

1)         The participant dies, becomes disabled, or otherwise has a severance from employment.

2)         The plan is terminated and no successor defined contribution plan is established or maintained by the employer.

3)         The participant reaches age 59½ or incurs a financial hardship.

If the distribution is made from pre-tax deferrals, including earnings, it will be deemed to satisfy these restrictions for an individual who does not otherwise meet 1), 2) or 3). Accordingly, the distributions are exempt from the 20% mandatory withholding and 10% excise tax that normally applies to certain early retirement plan distributions. Finally, any distributions cannot be rolled over.

Repayments

While there is no statutory duty to do so, individuals may repay the plan to restore their accrued benefits.

A repayment or repayments must be made within the three-year period measured from the day after the date a distribution was received. One or more payments may be made, but the amount restored cannot exceed the amount of the distribution or distributions.

A coronavirus-related distribution is not treated as an eligible rollover distribution and may not be contributed as a rollover contribution to an individual retirement account or another employer retirement plan.

Any repayment is treated as a rollover into any plan to into which the individual may make a rollover. If the individual cannot make a rollover into a plan, he or she may make the contribution to an individual retirement account.

It is unclear how repaying the distribution will affect the individual’s Federal income tax liability. We expect this will be addressed similarly to how similar contribution rules have been treated for hurricane disaster relief. See IRS Publication 976.

Plan Amendments

These provisions are voluntary. Employers are not required to offer this temporary distribution. If they do, however, plans will need to be amended.

PLAN LOANS

The Act temporarily increases the amount an individual may borrow from his or her account from a tax-qualified plan described in Sections 401(a), 403(a) or 403(b) of the Internal Revenue Code. The loan must be made to a qualified individual within 180 days of March 27, 2020. The Act also provides relief from making payments on loans that existed before the Act became law.

The dollar ceiling for qualified individuals on plan loans was temporarily increased from $50,000 to $100,000. The percentage of the accrued benefit subject to a loan increased from 50% to the present value of the nonforfeitable accrued benefit in the plan.

For qualified individuals with an outstanding loan on or after March 27, 2020, loan payments due on or after March 27, 2020, until December 31, 2020, are delayed for one year. The remaining loan is re-amortized to reflect the delayed due date and any interest that accrues during the delay.

The payoff deadline, which is 5 years unless the loan is used to finance a principal place of residence, and the equal installment requirement are disregarded.

Eligible Individuals

An individual is eligible if he or she:

1)         is, or his or her spouse or dependent is, diagnosed with the Virus or COVID-19 by a test approved by the Centers for Disease Control and Prevention; or

2)         experienced adverse financial consequences as a result of being quarantined, being furloughed, laid off or subject to a reduction in working hours due to the Virus or COVID-19, being unable to work due to lack of child care because of the Virus or COVID-19, closing or reducing hours of a business owned or operated by such individual due to the Virus or COVID-19 or other factors as determined by the Secretary of the Treasury.

Employee Certifications

Unlike the relief for retirement plan distributions for up to $100,000, the Act does not include a provision whereby plan administrators may rely on a certification by an individual certifying he or she meets 1) or 2) above.

Plan administrators will almost certainly require participants to provide evidence of a diagnosis of the Virus or COVID-19. Again, the lack of widespread testing in the U.S. may impact the ability to rely on 1).

Plan Amendments

The increased limits for plan loans appears to be voluntary on the part of employers. If the increase limits are allowed, plans will need to be amended. The suspension of payments appears to be mandatory. This implicates various issues. We expect guidance on this issue and whether it will require plans to be amended.

For additional information, please contact:  Mark L. Mathis at [email protected] or Jewell Lim Esposito at [email protected] with any questions or more specific situations.

About FisherBroyles, LLP

Founded in 2002, FisherBroyles, LLP is the first and world’s largest distributed law firm partnership. The Next Generation Law Firm® has grown to hundreds of partners in 23 offices globally. The FisherBroyles’ efficient and cost-effective Law Firm 2.0® model leverages talent and technology instead of unnecessary overhead that does not add value to our clients, all without sacrificing BigLaw quality. Visit our website at www.fisherbroyles.com to learn more about our firm’s unique approach and how we can best meet your legal needs.

These materials have been prepared for informational purposes only, are not legal advice, and under rules applicable to the professional conduct of attorneys in various jurisdictions may be considered advertising materials. This information is not intended to create an attorney-client or similar relationship. Whether you need legal services and which lawyer you select are important decisions that should not be based on these materials alone.

© 2020 FisherBroyles LLP

About FisherBroyles, LLP

Founded in 2002, FisherBroyles, LLP is the first and world’s largest distributed law firm partnership. The Next Generation Law Firm® has grown to hundreds of partners practicing in 24 markets globally. The FisherBroyles’ efficient and cost-effective Law Firm 2.0® model leverages talent and technology instead of unnecessary overhead that does not add value to our clients, all without sacrificing BigLaw quality. Visit our website at www.fisherbroyles.com to learn more about our firm’s unique approach and how we can best meet your legal needs.

These materials have been prepared for informational purposes only, are not legal advice, and under rules applicable to the professional conduct of attorneys in various jurisdictions may be considered advertising materials. This information is not intended to create an attorney-client or similar relationship. Whether you need legal services and which lawyer you select are important decisions that should not be based on these materials alone.

© 2024 FisherBroyles, LLP