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Coronavirus-related distributions


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My usual apology is this has been asked and answered.

The CARES Act allows special tax relief for 2020 distributions up to $100,000 by a "qualified individual" from a defined benefit plan, as long as the distribution is not made earlier than an otherwise-permitted distribution event. But the special tax relief implies that a lump sum will be taken. How would the $100,000 limit and special tax relief apply to an in-service annuity payment from a DB plan (or even a money purchase pension plan)?

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Life annuity payments are already exempt from the excise tax under 72(t) and 20% mandatory tax withholding.

Presumably, if the participant is a qualified individual, they would be able to treat up to $100,000 of their benefit payments received during 2020 as a coronavirus-related distribution, and would be able to recognize the income over 3 years, and/or repay it to an IRA or qualified plan.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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Two follow-ups: 

1. Since lifetime annuity payments aren't eligible rollover distributions, I would think the 3-year payback relief is not available.

2. Is there any reason why the ability to spread out tax over 3 years shouldn't apply to DB retirees who are qualified individuals?

Thanks for any input.

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2 hours ago, Ian said:

1. Since lifetime annuity payments aren't eligible rollover distributions, I would think the 3-year payback relief is not available.

Ian, Section 2202(a)(2)(B) says that the rollback must be "to an eligible retirement plan...to which a rollover contribution of such distribution could be made...." I think that would preclude annuity payments from being rolled over.

2 hours ago, Ian said:

Is there any reason why the ability to spread out tax over 3 years shouldn't apply to DB retirees who are qualified individuals?

If they, or their spouse or dependent, had COVID, or they suffered a cut in hours or lost job, it would seem they're just as deserving as anyone else.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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20 hours ago, Luke Bailey said:

Ian, Section 2202(a)(2)(B) says that the rollback must be "to an eligible retirement plan...to which a rollover contribution of such distribution could be made...." I think that would preclude annuity payments from being rolled over.

If they, or their spouse or dependent, had COVID, or they suffered a cut in hours or lost job, it would seem they're just as deserving as anyone else.

Hello Luke--The focus of the statutory provision that you quoted seems to be on whether a plan ordinarily accepts eligible rollover distributions, not on whether the distribution in question would ordinarily constitute an eligible rollover distribution--if that were the standard, then the CARES Act recontribution provision would be effectively meaningless, because any distribution that is already an eligible rollover distribution wouldn't need a special provision saying that it can be rolled over.  I note that the new IRS Q&As indicate that the CARES distribution repayments will generally be treated as rollover contributions, and a qualified plan that does not ordinarily accept rollovers would not be required to accept recontributions.  The converse--that a qualified plan that ordinarily does accept rollovers would be required to accept CARES distribution repayments--was not made explicit, but it was implied (I look forward to seeing further guidance on that point).  But please let me know if I am missing something, and have a great day!

Ian--The main question that I would focus on is whether any given payment constitutes a "coronavirus-related distribution".  If it does, then the recontribution provision is triggered (presumably with respect to any plan that ordinarily would accept a rollover from that given participant--although there is some ambiguity).  

  • "Any individual who receives a coronavirus-related distribution may, at any time during the 3-year period beginning on the day after the date on which such distribution was received, make 1 or more contributions in an aggregate amount not to exceed the amount of such distribution to an eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made under section 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16), of the Internal Revenue Code of 1986, as the case may be."  

Coronavirus-related distribution is defined as any distribution that is actually made (regardless of how categorized by the plan--see the new IRS Q&As) from an "eligible retirement plan" (which includes DB plans that are qualified under Section 401(a)) to a qualified individual during a specified timeframe (I note that only the first few annuity payments should be treated as fitting into the timeframe, unless the IRS issues specific guidance indicating that the entire annuity can be treated as distributed on Day 1, or except perhaps in the case of an actual annuity contract that is actually distributed from a plan within the applicable timeframe). 

Note, however, that the CARES Act does not give a plan permission to issue a distribution merely because the distribution would constitute a "coronavirus-related distribution" if distributed.  Section 2202(a)(6)(B) gives that relief only to specific listed plan types which notably do not include ordinary section 401(a) DB plans:  "For purposes of the Internal Revenue Code of 1986, a coronavirus-related distribution shall be treated as meeting the requirements of sections 401(k)(2)(B)(i), 403(b)(7)(A)(i), 403(b)(11), and 457(d)(1)(A) of such Code and section 8433(h)(1) of title 5, United States Code."  Accordingly, if you maintain a DB plan, you have to continue following the terms of the plan, and you can only amend those terms to permit additional distribution options to the extent that you would have been permitted to pre-CARES Act. 

Best of luck.

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1 hour ago, AKowalski said:

note that the new IRS Q&As indicate that the CARES distribution repayments will generally be treated as rollover contributions

AKowalski, I did note that when the Q&A's came out. My guess is that IRS included "generally" in its statement to avoid giving the impression that there was no type of distribution that would not be eligible for rollover, since DB annuity payments likely are not, or at least they wanted to think more about it. (You may have noticed that the Q&A's shed little light on any but the most obvious questions regarding the CARES Act distribution and loan rules, other than to confirm that 2005-92 was a place to look for guidance in interim.) Literally, since the plans listed, which of course are those that can generally take rollovers, could not in fact take a rollover "of such distribution" in the case of a DB annuity payment that otherwise happened to fit the CARES Act requirements, I think the statute supports the conclusion that such amounts cannot be rolled over, although of course they will generally qualify for the three-year tax spread. Maybe the statutory language does not compel that conclusion. You can certainly make a policy argument that the participant should be able to roll the amounts, if started to take his or her benefit early because of pandemic, but I can see countervailing considerations as well. Note also that Notice 2005-92 did not permit rollover of periodic distributions under KETRA.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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On 5/7/2020 at 3:21 PM, Luke Bailey said:

AKowalski, I did note that when the Q&A's came out. My guess is that IRS included "generally" in its statement to avoid giving the impression that there was no type of distribution that would not be eligible for rollover, since DB annuity payments likely are not, or at least they wanted to think more about it. (You may have noticed that the Q&A's shed little light on any but the most obvious questions regarding the CARES Act distribution and loan rules, other than to confirm that 2005-92 was a place to look for guidance in interim.) Literally, since the plans listed, which of course are those that can generally take rollovers, could not in fact take a rollover "of such distribution" in the case of a DB annuity payment that otherwise happened to fit the CARES Act requirements, I think the statute supports the conclusion that such amounts cannot be rolled over, although of course they will generally qualify for the three-year tax spread. Maybe the statutory language does not compel that conclusion. You can certainly make a policy argument that the participant should be able to roll the amounts, if started to take his or her benefit early because of pandemic, but I can see countervailing considerations as well. Note also that Notice 2005-92 did not permit rollover of periodic distributions under KETRA.

That's a good point.  The KETRA notice seems have taken the position that the main (or only?) legal effect of the KETRA recontribution provision was to extend the timeframe for making an indirect rollover from 60 days to 3 years, without making any distributions eligible for rollover that would not otherwise have been eligible.  

I did notice that the IRS did little more than point to the KETRA notice and say "We will probably say something like that--eventually".  It will be interesting to see where they ultimately follow the KETRA guidance.  On the loan deferral issue, the fact that the KETRA suspension period was greater than a year while the CARES suspension period is shorter than one year may ultimately require the IRS to come up with a slightly different set of rules.  If the ultimate safe harbor is just that payments can be deferred until the end of the CARES suspension period and then the entire loan must be re-amortized, then that arguably doesn't really accomplish the Congress's expressed intent to provide a 1-year deferral for each payment.  Of course, read literally, repayments on the old schedule would have to restart in January, and then there would be a re-amortization event in March--but that doesn't seem terribly administrable, and it is likely to feel kindof arbitrary to participants.  

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