On June 19, 2020, the Internal Revenue Service (the “IRS”) issued Notice 2020-50 which expands the categories of individuals eligible for coronavirus-related distributions (“CRDs”), loans, and loan repayment suspensions as well as resolves some of the issues that were concerning plan administrators and employers under the CARES Act. Under Section 2202 of the CARES Act, a qualifying CRD, which is subject to an aggregate $100,000 maximum, is: (1) not subject to the 10% additional tax on early distributions, (2) generally includible in income over a 3-year period, and (3) to the extent the distribution is eligible for tax-free rollover treatment and is contributed to an eligible retirement plan within a 3-year period, will not be included in income. Section 2202 also provides that: (1) for loans made during on or after March 27, 2020 (the date of enactment of the CARES Act) and before September 23, 2020, the limit on loans from an eligible retirement plan is raised to the lesser of $100,000 (reduced by the excess of outstanding loans) or 100% of the participant’s vested accrued benefit; and (2) for loans with outstanding balances on or after March 27, 2020, a one-year delay in loan repayment due dates is provided with respect to due dates occurring during the period from March 27, 2020, to December 31, 2020. For more information on these CARES Act topics see our prior newsletter here.
Expanded Definition of Qualified Individual
IRS Notice 2020-50 expands the CARES Act definition of a qualified individual who is eligible for CRDs, loans, and loan payment suspension. Under the original text of the CARES Act, a qualified individual was limited to:
- A participant (or the participant’s spouse or tax dependent) who is diagnosed with the virus SARS-CoV-2 or with COVID-19 (referred to collectively herein as “COVID-19”) by a test approved by the CDC, or
- A participant who experiences adverse financial consequences as a result of:
- being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19;
- being unable to work due to lack of child care due to COVID-19; or
- closing or reducing hours of a business owned or operated by the individual due to COVID-19.
The Notice expands the definition to include certain additional adverse financial consequence events and to include the spouse and other household members under the COVID-19 financial impact circumstance. Under the expanded definition, the following additions are included:
- A participant who experiences adverse financial consequences as a result of:
- the individual having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19;
- the individual’s spouse or a member of the individual’s household (as defined below) being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; or
- closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.
*A member of the individual’s household is someone who shares the individual’s principal residence.
In addition, the Notice clarifies that (1) CRDs do not need to be withdrawn solely to meet a need arising from COVID-19; (2) CRDs are permitted without regard to the qualified individual’s need for the funds; and (3) the amount of the distribution is not required to correspond to the extent of the adverse financial consequences experienced by the qualified individual.
CARES Act Plan Loans
As stated above, the expanded definition of a qualified individual also applies to determine who may take a coronavirus-related plan loan and who is permitted to delay loan repayments. To address questions raised by plan administrators, the IRS provided “safe harbor” procedures, described below, for implementing the suspension of loan repayments.
- A qualified individual’s repayment of a plan loan may be suspended for any repayments due between March 27, 2020, and December 31, 2020 (“suspension period”). The loan repayments resume after the end of this suspension period (i.e., resume January 1, 2021), and the term of the loan may be extended by up to 1 year from the date the loan was originally due to be repaid. Interest accruing during the suspension period must be added to the remaining principal of the loan.
- The loan may be reamortized and repaid in substantially level installments over the remaining period of the loan plus up to 1 year from the date the loan was originally due to be repaid. This will generally be 5 years from the date of the loan plus 1 more year.
- In addition, for clarity, the suspension/repayment relief is available for a qualified individual’s outstanding loans, regardless of whether it is a loan taken under the COVID-19 relief provisions.
- Example applying the safe harbor: On April 1, 2020, a participant with a nonforfeitable account balance of $40,000 borrowed $20,000 to be repaid in level monthly installments of $368.33 each over 5 years, with the repayments to be made by payroll withholding. The participant makes payments for 3 months through June 30, 2020. The participant is a qualified individual (as described above). The participant’s employer takes action to suspend payroll withholding repayments, for the period from July 1, 2020, through December 31, 2020, for loans to qualified individuals that are outstanding on or after March 27, 2020. Because the participant is a qualified individual, no further repayments are made on the participant’s loan until January 1, 2021 (when the balance is $19,477). At that time, repayments on the loan resume, with the amount of each monthly installment reamortized to be $343.27 in order for the loan to be repaid by March 31, 2026 (which is the date the loan originally would have been fully repaid, plus 1 year).
- While the Notice provides the safe harbor procedures above for implementing the suspension of loan repayments, it notes that there may be other reasonable ways to administer these rules. In addition, employers are not required to adopt the loan payment delay, but may choose to do so.
Accepting Recontributions of CRDs
In general, a qualified individual who receives a CRD that is eligible for tax-free rollover treatment is permitted to recontribute, at any time in a 3-year period, any portion of the distribution to an eligible retirement plan that is permitted to accept eligible rollover distributions. A plan administrator accepting the recontribution of a CRD must reasonably conclude that the recontribution is eligible for direct rollover treatment under section 2202(a)(3) of the CARES Act and that the recontribution is made in accordance with the rules under the Notice. In making this determination, the plan administrator may rely on an individual’s certification that the individual satisfies the conditions to be a qualified individual, unless the administrator has actual knowledge to the contrary. (The meaning of “actual knowledge” is further discussed below.)
It is anticipated that eligible retirement plans will accept recontributions of CRDs, which are to be treated as rollover contributions. However, eligible retirement plans generally are not required to accept rollover contributions. For example, if a plan does not accept any rollover contributions, the plan is not required to change its terms or procedures to accept recontributions of CRDs.
The Notice provides that eligible retirement plans must report the payment of a CRD to a qualified individual on Form 1099-R, even if the qualified individual recontributes the CRD to the same eligible retirement plan in the same year. If a payor is treating the payment as a CRD (and no other appropriate code applies), the payor is permitted to use distribution code 2 (early distribution, exception applies) in box 7 of Form 1099-R. However, a payor also is permitted to use distribution code 1 (early distribution, no known exception) in box 7 of Form 1099-R.
While not detailed in this Newsletter, the Notice does contain explanatory information for participants related to the treatment of the CRD for income tax purposes and for reporting on his or her tax return, including information about the CRD designation tax consequences in general, the 3-year income tax spread, and the 3-year recontributions.
- A qualified individual is permitted to designate a distribution, which would otherwise meet the requirements of a CRD, as a CRD without regard to whether the plan administrator amended the plan to permit CRDs.
- Similarly, any distribution received by a qualified individual as a beneficiary may be treated as a CRD.
- And, also, a pension plan (e.g., defined benefit, money purchase) distribution received by a qualified individual in connection with a plan permissible distributable event, and with spousal consent obtained (if otherwise required), may generally be designated and treated as a CRD by the individual.
- Periodic payments and distributions that would have been required minimum distributions (“RMDs”) but for the CARES Act, received by a qualified individual from an eligible retirement plan on or after January 1, 2020, and before December 31, 2020, are permitted to be treated as CRDs.
- In addition, the IRS released Notice 2020-51 which (1) permits rollovers of otherwise “waivable” RMDs that were received by individuals and certain related payments, including an extension of the 60-day rollover period for certain distributions to August 31, 2020; (2) answers questions relating to the waiver of 2020 RMDs; (3) and provides a sample plan amendment that, if adopted, would provide participants a choice whether to receive waived RMDs and certain related payments. Read the full Notice here.
- Qualified individuals may also designate plan loan offsets and reductions, which are taxable distributions, as CRDS.
- The following distributions are not permitted to be treated as CRDs:
- corrective distributions of elective deferrals and employee contributions that are returned to the employee (together with the income allocable thereto) in order to comply with the § 415 limitations,
- excess elective deferrals under § 402(g),
- excess contributions under § 401(k),
- excess aggregate contributions under § 401(m),
- loans that are treated as deemed distributions pursuant to § 72(p),
- dividends paid on applicable employer securities under § 404(k),
- the costs of current life insurance protection,
- prohibited allocations that are treated as deemed distributions pursuant to § 409(p),
- distributions that are permissible withdrawals from an eligible automatic contribution arrangement within the meaning of § 414(w), and
- distributions of premiums for accident or health insurance under § 1.402(a)-1(e)(1)(i).
- A plan administrator is permitted to choose whether, and to what extent, to treat distributions under its plans as CRDs (as well as whether, and to what extent, to apply coronavirus-related plan loan rules).
- For example, an employer may choose to provide for CRDs but choose not to change its plan loan provisions or loan repayment schedules.
- The employer (or plan administrator) is permitted to develop any reasonable procedures for identifying which distributions are treated as CRDs under its retirement plans.
- Plan administrators can rely on an individual’s certification that the individual is a qualified individual, unless having actual knowledge to the contrary. The Notice explains that “actual knowledge” for reliance purposes does not mean that the plan administrator has an obligation to inquire into whether the individual has satisfied the conditions; rather it is limited to situations in which the plan administrator already possesses sufficiently accurate information to determine the veracity of a certification.
- An example of an acceptable certification is provided in the Notice.
- If a distribution is treated as a CRD by an employer retirement plan, the plan administrator is not required to offer the qualified individual a direct rollover with respect to the distribution.
- The plan administrator is not required to provide a 402(f) notice.
- The plan administrator or payor of the CRD is not required to withhold 20% of the distribution, as is usually required.
- The IRS notes, however, that a CRD is subject to the voluntary withholding requirements.
- Under these voluntary requirements, withholding is at the 10% rate unless the participant opts out. The plan has an obligation to notify the participant of the ability to opt out of withholding. Therefore, the distribution forms should include a provision that allows the participant to elect out of withholding, and should state that income tax will be withheld at the 10% rate if no election is made.