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INSIGHT: How the IRS, DOL Believe CARES Act Takes Care of an Individual’s Savings, Retirement Benefits

May 11, 2020, 1:01 PM

The Internal Revenue Service and the Department of Labor recently described how they believe the CARES Act takes care of an individual’s savings and retirement benefits. On April 28 the DOL released EBSA Disaster Relief Notice 2020-01 [DOL Notice 2020-01]. On May 4 the IRS released coronavirus-related relief for retirement plans and IRAs questions and answers (IRS Q&A document). However, the new guidance leaves open many of the issues raised in my May 1, 2020, BNA Compensation Planning Journal article, How the CARES Act Takes Care of an Individual’s Savings and Retirement Benefits and does not give the basis for many of their conclusions beyond referencing the disaster playbook set forth in the 2005 IRS notice (the “KETRA Notice’’) IRS Notice 2005-92, pertaining to the Katrina Emergency Tax Relief Act, Pub. L. No. 109-73 (KETRA). This article discusses the above DOL and IRS guidance and the need for further guidance

WHICH COVID CASH FLOW RELIEF DOES THE IRS Q&A DOCUMENT DISCUSS?

The IRS Q&A document discusses the cash flow relief of the CARES Act for qualified individuals with savings and retirement benefits. But, the document does not discuss the similar cash flow relief in IRS Notice 2020-23, which was released on April 9, 2020, and defers all plan loan due dates between April 1, 2020 and July 14, 2020, for all borrowers until July 15, 2020. The CARES Act, in contrast, defers plan loan due dates between March 27, 2020, and Dec. 31, 2020, for a year, but only for a limited subset of those borrowers. IRS Notice 2020-23 also extends all 60-day periods to complete rollovers that would otherwise end between April 1 2020 and July 14, 2020 for all recipients until July 15, 2020. The CARES Act, in contrast, extends the due date to complete rollovers for distributions between Jan. 1, 2020, and Dec. 30, 2020, until three years after the date of receipt for a limited set of such recipients.

WHO QUALIFIES FOR CARES ACT CASH FLOW RELIEF?

The IRS Q&A document avoids the most significant relief issue, namely, who may obtain the CARES Act cash flow relief for qualified individuals with savings and retirement benefits by enhancing provisions for direct loans and indirect loans (repayable distributions) of such benefits. The document merely restates the explicit statutory factors as a bulleted list followed by flush language declaring that the IRS may exercise its authority to expand “the list of factors taken into account to determine whether an individual is a qualified individual as a result of experiencing adverse financial consequences.” IRS Q&A document, A-3. Thus, it is unclear how wide a net the IRS wishes to cast. However, the longer the IRS delays this guidance the longer will plan administrators be unable to stray from the specific factors the CARES Act sets forth. For example, they will not be able to treat individuals whose work hours have not been reduced, but whose compensation was reduced, or individuals furloughed as a result of the Covid-19 economic downturn, as qualifying individuals. It is reasonable to ask whether this is the result Congress intended by giving the IRS the discretion to add “other factors.” CARES Act Section 2202(a)(4)(ii)(III).

WHEN MAY PLAN ADMINSTRATORS RELY ON INDIVIDUAL CERTIFICATIONS?

The IRS Q&A document states that a plan administrator may rely on an individual’s qualified individual certification for the purposes of receiving a coronavirus-related distribution “unless the administrator has actual knowledge to the contrary.”IRS Q&A document, A-11. It is reasonable to ask whether this is the result that Congress intended, and whether the IRS has the authority to impose this condition.

The CARES Act, on the other hand, provides that the plan administrator “may rely on an employee’s certification,” without limiting such reliance in any manner.CARES Act Section 2202(a)(4)(B). Given that plan sponsors and administrators prefer to minimize risks, this additional condition will discourage them from providing any relief the CARES Act does not require a plan to provide. And the CARES Act provisions are more explicit than previous disaster-relief provisions. There was no reliance or certification provision for establishing eligibility for similar KETRA relief. Thus, the IRS had the statutory authority to find in the KETRA Notice that for KETRA purposes the plan administrator could rely on reasonable representations unless the plan administrator had actual knowledge to the contrary.

The IRS Q&A document’s limit on plan reliance would imply that the certification must describe the basis for the certification. Otherwise, the administrator may not be able to determine whether the basis was incorrect, because it would have no idea what the basis is. For example, the plan administrator would generally know if the plan sponsor had reduced a participant’s work hours. In such case, there would be no reason to request a certification from the participants.

The IRS Q&A document provides that the plan administrator may similarly rely on representations by a beneficiary or inactive participant seeking a coronavirus-related distribution.IRS Q&A document, A-11. This is consistent with the statute, which requires reliance for “employees” seeking a coronavirus-related distribution, CARES Act 2202(a)(4)(B), but is otherwise silent about reliance. This broadening of reliance is helpful for a plan administrator deciding whether, as required under the CARES Act, a beneficiary or inactive participant is entitled to decide whether taxes are to be withheld from any coronavirus-related distribution. This requirement arises from Cares Act Section 2202(a)(5) that uses the same language exempting these distributions from mandatory withholding as Cares Act Section 2203(b) uses to do so with respect to distributions that would otherwise be minimum required distributions for 2020.

The IRS said nothing further about certification procedures or reliance on representations for the purposes of a beneficiary or an inactive participant seeking a coronavirus-related distribution, or of the loan relief provisions.

DOES THE CARES ACT REQUIRE PLAN ADMINSTRATORS TO DEFER DUE DATES ON PLAN LOANS?

The IRS Q&A document also declares that “an employer may … choose not to change its … loan repayment provisions.”IRS Q&A document, A-9. Prior to this guidance, many administrators appear to believe that they have such discretion, and could thereby avoid the administrative burden of implementing a policy to defer plan loan due dates. For example, Bradford Campbell, Consider Near- and Long-Term Issues Before Implementing CARES Act Provisions, Plan Sponsor (May 4, 2020) reported that only 56% of surveyed plan sponsors plan to defer plan loan due dates. The document’s basis for the discretionary conclusion is a reference to the Section 5.B holding of the KETRA Notice. IRS Q&A document A-8. However, there was no basis for the conclusion in that section. That may reflect the fact that the conclusion is contrary to the language of the statute.

The CARES Act provides that “[i]n the case of qualified individual with an outstanding [plan] loan (on or after the date of enactment of this Act [March 27, 2020]) … if the due date pursuant to subparagraph (B) or (C) of section 72(p)(2) of such Code for any repayment with respect to such [plan] loan occurs during the period beginning on the date of the enactment of this Act and ending on December 31, 2020, such due date shall be delayed for 1 year.” Cares Act Section 2202(b)(2)(A) (emphasis added). Therefore, the plan administrator must defer such plan loan due dates in accord with the pre-KETRA Supreme Court 1998 declaration in Lexecon, Inc. v. Milberg Weiss Bershad Hynes & Lerach that, “[t]he mandatory ‘shall’ … normally creates an obligation impervious to judicial discretion.”

Moreover, the word “shall” is used twice more in the same sentence. The first provides that interest accrues to account for the payment delays. Cares Act Section 2202(b)(2)(B). The second provides that when payments resume, they will be level amortization payments Cares Act Section 2202(b)(2)(C). The IRS Q&A document provides that those two provisions are mandatory. IRS Q&A document A-8. Consequently, the plan administrator must also defer the plan loan due dates in accord with two other Supreme Court decisions. First, the pre-KETRA Court 1994 declaration in Ratzlaf v. United States that “A term appearing in several places in a statutory text is generally read the same way each time it appears. Second, the Court 2012 declaration in Mohamad v. Palestinian Auth. that this same meaning presumption is “at its most vigorous when a term is repeated within a given sentence,” as occurs for this loan repayment relief.

The IRS Q&A document also declares that “if a loan is outstanding on or after March 27, 2020, and any repayment on the loan is due from March 27, 2020, to December 31, 2020, that due date may be delayed under the plan for up to one year.” IRS Q&A document A-8 (emphasis added). As discussed above the statute provides that the delay is not “for up to one year,” but for precisely one year, although a borrower may choose to not take full advantage of any of the due date deferrals by making an earlier loan payment. If that is the intended meaning of the declaration, it is correct. If the meaning is that the plan administrator may choose to defer the plan loan dates by less than a year, it is incorrect as discussed above.

DOES IRS NOTICE 2020-23 REQUIRE PLAN ADMINSTRATORS TO DEFER DUE DATES ON PLAN LOANS?

It is advisable that when the IRS describes the significance of the debt extension provisions of the CARES Act, including how to adjust loan payments to account for any deferred payments, the IRS declare that similar rules are applicable to the extension of loan due dates until July 15, 2020, that was granted to all plan loan borrowers from the same set of eligible retirement plans for due dates between April 1, 2020, and July 14, 2020, by IRS Notice 2020-23, as discussed below. Such deferrals are part of the traditional disaster playbook, but there is rarely an explanation of how to adjust loan payments to account for any deferred payments.

This universal plan borrower relief is created by the final paragraph of III.A of IRS Notice 2020-23 (April 9, 2020) that extends the deadline until July 15, 2020, for completing any of the acts set forth in Revenue Procedure 2018-58 that had to be performed on or after April 1, 2020, and before July 15, 2020. That Revenue Procedure provides relief for those suffering from federally declared disasters. The first item on its list of employee benefit “postponed acts” is loan payment due dates, which is described, as in the CARES Act, by a reference to keeping the loan in compliance with IRC Sections 72(p)(2)(B) and (C). Id., Sec. 8, at 998. It seems most reasonable to interpret IRS Notice 2020-23 that defers until July 15, 2020, an individual’s obligation to pay the individual’s 2019 individual income taxes that are otherwise due on or before April 15 and the individual’s 2020 estimated individual income tax payments that are otherwise due on or before April 15, 2020, and or before June 15, 2020, as also deferring until July 15, 2020, the same individual’s obligation to otherwise make plan loan payments between April 1, 2020, and July 14, 2020. The long-time prevalence of such plan loan relief is demonstrated by the fact that the predecessor of Rev. Proc. 2018-58, Rev. Proc. 2007-34 used the same language in the same procedure section to refer to such relief, as being available to be invoked by the IRS when appropriate for a disaster. Id., Sec. 8, at 395. Moreover, its predecessor, Rev. Proc. 2005-27, which was released before Hurricane Katrina, also used the same language in the same procedure section. Id., Sec. 8, at 1058.

WHICH DISTRIBUTION AND REPORTING RULES DOES THE CARES ACT LEAVE UNCHANGED?

The IRS Q&A document correctly observed that the joint and survivor requirements and the IRC Section 401(a)(36) restrictions on money purchase plan distributions govern coronavirus-related distributions.IRS Q &A document, A-10. The IRS Q&A document also clarified that eligible retirements plans, which include individual retirement accounts and individual retirement annuities (IRAs), will have to report any coronavirus-related distributions, like other distributions, on a Form 1099-R, even if the individual repays the distribution to an eligible retirement plan (including an IRA) in the same tax year.IRS Q&A document A-14.

WHAT CLARIFICATION DID THE DOL GIVE ABOUT THE CARES RELIEF PROVISIONS?

DOL Notice 2020-01 declares that there is no ERISA fiduciary violation “solely because: (1) the person made a plan loan to a qualified individual during the loan relief period in compliance with the CARES Act and the provisions of any related IRS notice or other published guidance; or (2) a qualified individual delayed making a plan loan repayment in compliance with the CARES Act and the provisions of any related IRS notice or other published guidance.” By mentioning the loan due date extensions, the notice went farther than U.S. Labor Department Acts to Improve Access of Hurricane Victims to 401(k) Loans and Withdrawals, U.S. DOL Release 05-2188-NAT (Nov. 30, 2005), which addressed similar KETRA relief. However, DOL Notice 2020-01 does not address the notice or qualified individual requirements of the CARES Act, or any aspects of IRS Notice 2020-23.

WHAT FURTHER GUIDANCE IS NEEDED FROM THE IRS AND THE DOL IN THE NEAR FUTURE?

Thoughtful IRS and DOL guidance is needed in the near future regarding the following six major issues with respect to Covid-19 relief that may otherwise not be available in practice, and the role of savings and retirement plans (including IRAs) in providing such relief:

  • Who are qualified individuals, and how may they may be determined?

  • What plan notices must be provided pertaining to the enhanced loan provisions, and to the enhanced distribution provisions?

  • What is the DOL position with respect to fiduciary responsibilities pertaining to qualified individual certifications and notices pertaining to the enhanced direct and to the indirect loan provisions of the CARES Act and of IRS Notice 2020-23?

  • Must plans defer loan payment due dates by qualified individuals for due dates between March 27, 2020, and Dec. 31, 2020, in the same manner as IRS Notice 2020-23 requires plans to do so until July 15, 2020, for all participants and beneficiaries for due dates between April 1, 2020, and July 14, 2020?

  • How may plans determine the new amortization schedule for those deferring such payments in accord with either set of cash flow relief provisions?

  • Must plan administrators give qualified individuals the right to avoid withholding on the enhanced distributions that the Act calls coronavirus-related distributions in the same manner that plan administrators must do so for all participants and beneficiaries on the distributions that, absent the CARES Act, would be 2020 required minimum distributions?

  • May qualified individuals repay all coronavirus-related distributions within three years to an eligible retirement plan (including an IRA), or are some distributions ineligible, such as periodic payments, or non-spousal beneficiary distributions, which individuals may rollover directly to an IRA pursuant to IRC Section 402(c)(11) that was added by the Pension Protection Act of 2006, after 2005 when KETRA was enacted and the KETRA Notice was released?

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Albert Feuer is the principal attorney in the Law Offices of Albert Feuer, Forest Hills, N.Y. The firm focuses on employee benefits, executive compensation, estate planning and administration, and related tax issues. Thanks to Anna Masilela, who was instrumental in preparing this article.

Albert Feuer © 2020

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