Ten Percent Tax on Early Distributions
The 10% additional tax that generally applies to distributions received prior to age 59-1/2 from IRAs and tax qualified retirement plans (including 401(k) plans) will not apply to any coronavirus-related distribution, provided that such distributions to an individual do not exceed $100,000 in any tax year. An employer and its affiliated companies may distribute to a plan participant up to the $100,000 limit in the aggregate from their plans without having to inquire whether the participant has received similar distributions from IRAs or other unrelated plans.
“Coronavirus-related distribution” is defined to mean any distribution from such a plan made at any time during calendar year 2020 to an individual who tests positive or whose spouse or dependent tests positive for SARS-CoV-2, or COVID-19, or who experiences adverse financial consequences as a result of being quarantined; being furloughed or laid off or having work hours reduced; or being unable to work due to lack of child care, or as a result of the closure or reduction in hours of a business owned or operated by the individual, in each case due to the virus or disease. The plan administrator may rely on the participant’s certification that one of these conditions is satisfied.
A participant receiving a coronavirus-related distribution may recontribute the distributed amount (or any portion or portions of it) back into the plan or into an IRA or any other tax qualified plan that accepts rollover contributions at any time within three years following the date of distribution. Any such recontribution is treated as a direct rollover contribution, so that it should not disqualify the participant from making other non-direct rollovers in the same tax year.
Amounts that are not recontributed to a qualified plan or IRA are included in the participant’s income over three years, one-third each year. However, a participant may elect to include the entire distribution in income in the year of distribution.
The distributions are not subject to income tax withholding, and plan administrators are not required to provide direct rollover notices to participants receiving such distributions.
Qualified Plan Loans
During the 180-day period following the date of enactment of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), a participant who would be eligible to receive a coronavirus-related distribution from a tax qualified plan may receive plan loans in an amount not to exceed the lesser of $100,000 (increased from $50,000) or 100% (increased from 50%) of the participant’s vested account balance. Any such participant who has an outstanding plan loan or obtains a plan loan may defer any loan payments otherwise due between the date of enactment of the CARES Act and December 31, 2020, for one year, with corresponding adjustments to other loan payments.
Temporary Waiver of Required Minimum Distributions
The required minimum distribution requirements will not apply to defined contribution qualified plans (including 401(k) plans) and IRAs for distributions that otherwise would be required to be made in 2020 (including distributions required to be made by April 1, 2020, to individuals who turned 70-1/2 in 2019). However, any distribution that is made in 2020, up to what would have been the required minimum distribution amount, will not be eligible for direct rollover.
Plan Amendments
Employers are not required to adopt plan amendments in advance of operating under the plan distribution, plan loan and temporary required minimum distribution provisions described above. Employers will have at least through the last day of the plan year beginning in 2022 (2024 for governmental plans) to adopt retroactively any plan amendments that may be necessary to conform the plan document to such operations.
Delay in Payment of Required Contributions to Single-Employer Pension Plans
The due date for minimum required contributions (including quarterly contributions) to single-employer defined benefit pension plans that otherwise would be due during calendar year 2020 is now January 1, 2021. The amount of each such minimum required contribution must be increased by interest accruing at the plan’s interest rate for the period from the original contribution due date through the actual payment date. For purposes of applying benefit payment restrictions to underfunded plans, plan sponsors may use the plan’s funding percentage determined for the last plan year ending prior to 2020 as the applicable funding percentage for any plan years that include (end in or begin in) 2020.
How Manatt Can Help: Manatt is closely following the various retirement plan relief measures being implemented to offer financial assistance to employees and retirees affected by the COVID-19 pandemic and pension contribution relief to employers. We are here to help employers work with their retirement plan administrators to take advantage of the financial and tax relief options being made available.
For More Information: Contact David Herbst, partner, Manatt Tax, at dherbst@manatt.com or 650.812.1320.