To help address COVID-related labor shortages, the Internal Revenue Service recently reminded employers that they generally will not jeopardize the tax status of their pension plans if they rehire retirees or permit distributions of retirement benefits to current employees who have reached age 59 ½ or the plan’s normal retirement age.

With the COVID-19 pandemic, many employers, including governmental employers (such as public school districts), are looking for ways to encourage retirees to return to the workforce to fill open positions and experienced employees to stay on the job, according to an IRS news release.

Some Help

The IRS is providing help to these employers in two new frequently asked questions (FAQs), designed to offer technical guidance to public and private employers who sponsor pension plans for their employees. The FAQs highlight existing ways that employers can meet their employment objectives and still comply with the plan qualification rules.

Under the FAQs, an employer can generally choose to address unforeseen hiring needs by rehiring former employees, even if those employees have already retired and begun receiving pension benefit payments. Also, if permitted under plan terms, those employees may continue receiving the benefits after they are rehired, according to the news release.

Moreover, an employer can generally choose to make retirement distributions available to existing employees who have reached age 59 ½ or the plan’s normal retirement age. This may assist in the retention of employees eligible for retirement.

Here’s an example of some the questions and answers according to an IRS release:

Q1. What are the special rules for retirement plans and IRAs in section 2202 of the CARES Act?

A1. In general, section 2202 of the CARES Act provides for expanded distribution options and favorable tax treatment for up to $100,000 of coronavirus-related distributions from eligible retirement plans (certain employer retirement plans, such as section 401(k) and 403(b) plans, and IRAs) to qualified individuals, as well as special rollover rules with respect to such distributions. It also increases the limit on the amount a qualified individual may borrow from an eligible retirement plan (not including an IRA) and permits a plan sponsor to provide qualified individuals up to an additional year to repay their plan loans. See the FAQs below for more details.

Q2. Does the IRS intend to issue guidance on section 2202 of the CARES Act?

A2. The Treasury Department and the IRS are formulating guidance on section 2202 of the CARES Act and anticipate releasing that guidance in the near future. IRS Notice 2005-92 PDF, issued on Nov. 30, 2005, provided guidance on the tax-favored treatment of distributions and plan loans under sections 101 and 103 of the Katrina Emergency Tax Relief Act of 2005 (KETRA) as those provisions applied to victims of Hurricane Katrina. The Treasury Department and the IRS anticipate that the guidance on the CARES Act will apply the principles of Notice 2005-92 to the extent the provisions of section 2202 of the CARES Act are substantially similar to the provisions of KETRA that are addressed in that notice.

Q3. Am I a qualified individual for purposes of section 2202 of the CARES Act?

A3. You are a qualified individual if –

  • You are diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;
  • Your spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;
  • You experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;
  • You experience adverse financial consequences as a result of being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or
  • You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.

Under section 2202 of the CARES Act, the Treasury Department and the IRS may issue guidance that expands the list of factors taken into account to determine whether an individual is a qualified individual as a result of experiencing adverse financial consequences. The Treasury Department and the IRS have received and are reviewing comments from the public requesting that the list of factors be expanded.

Q4. What is a coronavirus-related distribution?

A4. A coronavirus-related distribution is a distribution that is made from an eligible retirement plan to a qualified individual from January 1, 2020, to December 30, 2020, up to an aggregate limit of $100,000 from all plans and IRAs.

Q5. Do I have to pay the 10% additional tax on a coronavirus-related distribution from my retirement plan or IRA?

A5. No, the 10% additional tax on early distributions does not apply to any coronavirus-related distribution.

Q6. When do I have to pay taxes on coronavirus-related distributions?

A6. The distributions generally are included in income ratably over a three-year period, starting with the year in which you receive your distribution. For example, if you receive a $9,000 coronavirus-related distribution in 2020, you would report $3,000 in income on your federal income tax return for each of 2020, 2021, and 2022. However, you have the option of including the entire distribution in your income for the year of the distribution.

Further details can be found in the two new FAQs now posted on IRS.gov.

Also, on Oct. 27 and 28 from 4-5 p.m. ET, the Department of the Treasury and the Department of Education will be holding webinars for education leaders and other stakeholders to discuss approaches to addressing school staff labor shortages, including a discussion about these new FAQs.

Webinars:

Webinar 1: Teacher and substitute teacher shortages

Webinar 2: Staff shortages, such as school bus drivers and food service workers

  • Oct. 28, 2021, at 4 p.m. Eastern Time

Participants should pre-register

Source: IRS