Recent IRS Snapshot Regarding Deemed Distributions for Participant Loans Reminds Employers of Risk of Plan Loan Errors
The IRS recently released an Issue Snapshot (the “Snapshot”) focusing on participant loans from retirement plans and when certain compliance errors could trigger deemed distributions with respect to such loans. Specifically, the Snapshot lists the following requirements, which if not satisfied, will cause a participant loan to be treated as a deemed distribution: Enforceable agreement requirement, which generally requires a participant loan to be a legally enforceable agreement (which may include more than one document) and the terms of the agreement demonstrate compliance with the applicable requirements of the Code. Maximum loan amount limit requirement, which generally limits the maximum amount of a participant loan to the amount specified under the Code. The Snapshot also noted the CARES Act allowed modifications to the loan limit for certain loans to “qualified individuals.” Repayment period requirement, which generally requires the repayment period of a loan be limited to five years, unless the loan… Continue Reading
Pursuant to Section 274 of the COVID-related Tax Relief Act of 2020, the IRS recently issued Notice 2021-11 which extends the repayment dates for the payroll tax deferral relief provided under IRS Notice 2020-65 (discussed in our prior blog post here). Under IRS Notice 2020-65, deferred employment taxes had to be withheld and remitted to the IRS in substantially equivalent installments from wages or other compensation paid to employees between January 1, 2021 and April 30, 2021, with interest and penalties on unpaid deferred taxes beginning to accrue on May 1, 2021. Under Notice 2021-11, the timing for withholding and payment of these taxes is extended through December 31, 2021, and the date that interest and penalties begin to accrue on unpaid deferred taxes is delayed until January 1, 2022. Notice 2021-11 is available here.
Use Care When Implementing CARES Act Retirement Plan Distributions ?Çô State Law and Benefit Offset Concerns
As we have previously reported on our blog here and here, the CARES Act provided relief to participants in retirement plans by allowing employers to amend their retirement plans to include certain coronavirus-related distributions and to permit increased loan amounts for certain qualified individuals. Many employers have agreed to adopt these changes, and under federal law, the treatment of these distributions is clear. But there are other issues that employers and employees should consider, including: The coronavirus-related distributions could be subject to taxation under state law, even if the employee later repays the distribution to the plan; and If employees are receiving unemployment and/or disability benefits, the coronavirus-related distributions may reduce or offset these benefits. However, the enhanced loans would not be subject to taxation and may not offset unemployment and disability benefits, which may make the enhanced loan a better option for employees who anticipate paying back the distribution.… Continue Reading