IRS Updates FAQs on COVID-19-Related Deadline Extensions, Adds Items on Loan Offsets and HSAs

The IRS has updated its FAQs on filing and payment relief during the COVID-19 emergency to incorporate the additional relief provided in Notice 2020-23 (see our Checkpoint article). That notice significantly expanded the filings and other actions (otherwise due on or after April 1 and before July 15, 2020) that are eligible for an automatic extension to July 15, 2020. Actions now eligible for the IRS relief include 44 actions relating to employee benefit plans that are listed in Revenue Procedure 2018-58. The updated FAQs focus primarily on federal income tax filing and payment relief, but several relate to employee benefit matters. Here are highlights:

• Plan Loan Offset Rollovers. A new Q/A explains that all or any portion of a 2019 qualified plan loan offset may be rolled over to an eligible retirement plan no later than October 15, 2020, provided the accountholder’s tax return is filed by July 15, 2020. [EBIA Comment: Qualified plan loan offsets are limited to offset amounts treated as distributions to a participant or beneficiary solely due to plan termination or a default caused by the participant’s severance from employment.]
• Excess Elective Deferrals. A Q/A on excess elective deferrals (see our Checkpoint article) has been removed. It became obsolete when Notice 2020-23 extended relief to all of the “specified time-sensitive actions” listed in Revenue Procedure 2018-58—a list that includes the correction of excess deferrals.
• Excess HSA Contributions. Another new Q/A (under the “Health Savings Accounts (HSAs) and Archer Medical Savings Accounts (MSAs)” heading) affirms that individuals who made excess contributions to their HSAs in 2019 can avoid the 6% excise tax on those contributions if they withdraw the excess (and any income on the excess) by July 15, 2020. The Q/A states that this does not apply to salary reduction contributions or if the individual takes a tax deduction for the excess contribution. If the excess contributions are not withdrawn by that date, the excess may still be correctible by October 15, 2020, if the individual’s tax return is filed by July 15, 2020. [EBIA Comment: Form 8889 explains that the excise tax attributable to employer contributions can be avoided by timely withdrawal of the excess, but only if the contributions are treated as taxable. Whether this Q/A means to deny the extension to all corrections involving salary reduction, or only if the salary reduction contributions are not recharacterized as taxable, is unclear.]

EBIA Comment: The IRS has noted that these FAQs will be periodically updated, and we would not be surprised if benefit plan issues receive more attention in future updates. Plan sponsors and advisors should keep in mind that these FAQs are not citable as legal authority and are general responses that may not apply to particular situations or may involve additional steps that are not mentioned. For example, the FAQ on HSAs, and another FAQ on the return of excess contributions to IRAs appear to rely on Treas. Reg. § 301.9100-2, which gives taxpayers an automatic 6-month extension for a correction if they file a timely return and take specified corrective action by the end of the extension period. In the case of excess contributions, corrective action would include the filing of an amended return, but the FAQs do not mention that step. For more information, see EBIA’s 401(k) Plans manual at Sections VIII.H (“Rollover Contributions”), VIII.M (“Correcting Excess Deferrals”), and XIV (“Distributions: Rollovers and Taxation”). See also EBIA’s Consumer-Driven Health Care manual at Section XII.N (“What Happens If Too Much Is Contributed to an HSA?”).

Contributing Editors: EBIA Staff.