How CARES Act Affects Employee Retirement Plan Distributions

Even if you’re not quite back to business as usual, it’s tax time, and the IRS expects you to be ready. That includes compliance with CARES Act Section 2202, Special Rules For Use of Retirement Funds. If you allowed your employees to access emergency distributions, rollovers, and loans, they must address those funds in their 2020 tax returns.

CARES Act provided relief for families with pandemic-related financial emergencies. Employees who met these coronavirus-related conditions qualified for retirement plan distributions under the special rules.

• Must receive a Distribution during 2020
• Diagnosed with COVID-19) based on a CDC-approved test
• Your spouse tested positive for COVID-19
• Experienced adverse financial issues due to a COVID-19 quarantine, furlough, lay-off, or hour reduction
• Financial difficulty due to COVID-19 related childcare issues
• Financial loss due to business closing or reduced operations due to COVID-19

CARES Act Retirement Plan Rules

Congress designed CARES Act retirement plan rules to provide emergency financial access during the pandemic. They function similarly to provisions in the Hurricane Katrina Emergency Tax Relief Act of 2005. The rules expanded distribution options and waived certain taxes and other requirements. IRS Notice 2020-50 provided guidance for rule implementation. The December 2020 Consolidated Appropriations Act further modified the rules.

• Qualified Plans: The rules consider 401(k) plans, 403(b) plans, governmental section 457(b) plans as qualified. The Consolidated Appropriations Act added Money Purchase Pension Plans as a coronavirus-qualified retirement plan.
• Distribution Age: Employees under age 59&½ or not qualified based on permittable distribution events qualified for distributions based on temporary coronavirus rules.
• Maximum Distribution: The rules increased the aggregate loan maximum from $50,000 to $100,000
• 10% Additional Tax: The IRS waived the tax on early distributions.
• Employee Distribution Certification: Employees were allowed to self-certify during the application process. They must prove they were qualified for a distribution when filing their 2020 taxes.

Implementation of CARES Act rules was optional. As an employer, you could allow coronavirus distributions but retain traditional loan repayment rules. Regardless of the employer’s choice, if a distribution met CARES Act distribution guidelines, the employee may treat it as such when they file their taxes.

Employee Taxes and Repayment

Employees received CARES Act qualified distributions through December 2020. Beginning with their 2020 taxes, they must include one-third of their distribution as taxable income over each of the next three years. Employers must issue form 1099-R for coronavirus-related distributions. If no other codes apply, you may use early distribution code 2 (exception) or code 1 (no known exception) in box 7.

If they choose, employees may repay a coronavirus-distribution. As long as they contribute their funds to an eligible retirement plan, the IRS will treat the repayment as a rollover.

They must also complete the repayment within three years of the distribution date. If they meet repayment requirements, they won’t owe taxes on the distribution amount. If the employee included repaid distribution amounts as ratable income in 2020, 2021, or 2022, they might file amended returns to request a refund.

Contact Health Consultants Group

If you need to know more about CARES Act coronavirus retirement fund distributions, give us a call at (800) 367-2482.