The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) permitted coronavirus-related distributions (CRDs) from qualified retirement plans (employer plans) and individual retirement accounts and similar accounts (IRAs) and increased the amount permitted for plan loans, as described in our earlier alert. The IRS has now issued Notice 2020-50 (the “Notice”) with guidance that expands and explains the rules for CRDs and plan loans.

Who is a “Qualified Individual” – Expanded to Household

CRDs are available to “qualified individuals,” which was previously defined as (1) an individual diagnosed with COVID-19; (2) an individual whose spouse is diagnosed with COVID-19, or (3) an individual who suffered adverse financial consequences as a result of quarantine, furlough, layoff or reduction in hours as a result of COVID-19. The Notice now expands the third qualification to include:

• An individual who has a reduction in pay or the rescission of a job offer or delay of a start date due to COVID-19;
• An individual whose spouse or member of the individual’s household suffered, as a result of COVID-19, a quarantine, furlough, layoff, reduction in hours or pay, lack of childcare, or job offer rescission or start date delay; and
• An individual whose spouse or member of the individual’s household owned a business that closed or experienced a reduction in hours.

As a result, the expanded rule effectively looks at the full household for COVID-19 effects, as was recommended by many commentators.

The IRS further clarified that employers and IRA providers may rely on the self-certification of the individual without any duty to investigate, unless the employer/IRA provider has “actual knowledge” that the individual does not satisfy the requirements. “Actual knowledge” means the employer/IRA provider already possesses sufficiently accurate information to determine the veracity of a certification.

What is a CRD? – Expanded to MRDs and Loan Offsets

A CRD is a distribution made from a plan or IRA between January 1, 2020 and December 31, 2020 that does not exceed $100,000. The IRS clarifies that a payment that would have been a minimum required distribution (MRD), but is not a MRD because under the CARES Act there are no MRDs for 2020, can still qualify as a CRD if paid during 2020. Likewise, the Notice provides that plan loan offsets and reductions which are taxable distributions can also qualify as CRDs if they occur during 2020.

However, not all distributions made during 2020 are CRDs. The IRS specifically identifies the following as not qualifying as CRDS: 
•    corrective distributions of elective deferrals and contributions that exceed Code Section 415 limits, 
•    corrective distributions of contributions that exceed the Code Section 402(g) limits or are needed to correct ADP/ACP 401k testing, 
•    loans treated as deemed distributions from a plan, 
•    dividends paid to plan participants on employer securities under a plan, and 
•    several other technical “distributions.”

Another clarification made in the Notice is that the amount of the CRD distribution is not limited to the amount of any specific financial need arising from the individual’s qualified status, although the individual must suffer some adverse financial consequences. The existence of adverse financial consequences is left to the individual to certify. Thus, if an individual certifies qualified status and withdraws $50,000, neither the individual nor the plan must show that the adverse financial consequences were at least equal to the $50,000.

CRD Terms – Clarifications

An employer plan may be amended to allow a CRD even if no other event of distribution, such as termination of employment, disability or attainment of age 59-1/2, has occurred. CRDs may include types of contributions (such as safe harbor matching) that are not otherwise permitted to be paid out as an in-service distribution. But, the availability of CRDs is optional for each employer — the employer is not required to allow CRDs. 

It should be noted that the employer is not permitted to exceed the $100,000 limit on CRDs among all of its plans and those of its controlled group. This aggregation rule applies to determine if employers have exceeded the limit but the aggregation rule for individuals includes all distributions from any source, including IRAs.

Taxation of CRDs is permitted to be spread over 3 years and they are not subject to the 10% early distribution excise tax. CRDs that are otherwise eligible for rollover can be repaid to the same or another plan or IRA and the CRD will be treated as a rollover (and not taxed). CRDs that would otherwise be considered distributions treated as eligible for rollover are not subject to rollover rules, including the 402(f) notice and the mandatory 20% withholding (although voluntary withholding rules do apply).

An employer/IRA provider is permitted to choose whether, and to what extent, to treat distributions under its plans/IRAs as CRDs (as well as whether, and to what extent, to apply coronavirus-related plan loan rules). An individual may treat a distribution as a CRD even if the employer plan does not.

CRD Tax Reporting

Where the plan or IRA provider has chosen to allow CRDs, each CRD must be reported by the plan/IRA provider on Form 1099 with some choice of codes for Box 7. An employer plan or IRA may accept the contribution of an individual’s CRD within 3 years of the distribution as a rollover contribution based on the individual’s certification of the CRD eligibility. However, an employer plan or IRA is not required to accept such contributions.

Where the individual is claiming CRD treatment the individual reports the CRD on his or her individual tax return and files Form 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments (a new form yet to be issued). The individual elects CRD status on this Form and elects whether to have the CRD included in taxable income in 2020 alone or ratably over 3 taxable years. Form 8915-E is also where recontributions are reported and, depending on when the recontribution occurs, may trigger a requirement to file an amended tax return with an amended Form 8915-E. The individual may elect to apply any recontribution in one year that exceeds the income required to be included in that year to either of the other 3 years over which the individual may have elected to be taxed. 

Plan Loans – A Safe Harbor for Loan Suspensions

The CARES Act increased the employer plan loan limits to $100,000 or 100% of the participant’s account balance for loans made between March 27, 2020 and September 20, 2020. Under the CARES Act, outstanding plan loans disbursed on or after March 27, 2020 and on or before December 31, 2020 may have repayments delayed for 1 year. Once again, these special delay provisions are optional for each employer — employers are not required to implement them.

Employers have considered ways to administer the 1-year delay. The IRS recognizes that there may be alternatives, but the Notice offers a “safe harbor”. Under the safe harbor, for any repayment that was due during the period March 27, 2020 through December 31, 2020 and that was suspended under the CARES Act, the loan is reamortized over the original period of the loan plus 1 year (even if that exceeds 5 years), paid starting in January 2020 in substantially equal installments, and includes interest accruing during the suspension period.

Like CRDs, a plan administrator may rely on an individual’s self-certification that the individual is a “qualified individual” for CARES Act purposes and thus eligible for loan suspension.

Nonqualified Plans Can Permit Cancellation of Deferral Elections

In a significant departure from earlier informal guidance, the Notice allows a “qualified individual” to cancel his or her deferral election under a nonqualified deferred compensation plan. Under Code Section 409A, any deferral election is irrevocable after the start of the calendar year and an individual is generally prohibited from cancelling any deferral election during the middle of the year. Earlier informal guidance from the IRS had suggested that Code Section 409A would not make an exception to this general rule and that the IRS did not consider this to be an area where relief was needed. Instead, the Notice now treats a qualified individual as satisfying the limited ‘hardship’ exception from the Code Section 409A rules, which entitles the individual to cancel his or her deferral election mid-year. It is important to note that the election must be cancelled, not suspended or delayed. Thus, the election cannot be resumed within the year for which the election was made (e.g., 2020). Individuals who satisfy the rules to be considered qualified individuals under the expanded definition can cancel their elections if the plan permits it. 

Once again, this is an optional amendment for employers — employers are not required to allow cancellation.