IRS Releases New Guidance for Distributions and Loans from Retirement Plans Under CARES Act

June 29, 2020

The Internal Revenue Service recently published additional guidance on the coronavirus-related distributions and loans provisions of Section 2202 of the CARES Act. Notice 2020-50 is intended to assist employers and plan administrators, trustees and custodians, and qualified individuals in applying Section 2202 to take advantage of greater access to plan distributions and plan loans.

Expansion to Definition of ‘Qualified Individual’

Under Section 2202 of the CARES Act, “qualified individuals” receive favorable tax treatment with respect to distributions from eligible retirement plans that are coronavirus-related distributions. The CARES Act also allows special treatment for plan loans by increasing the allowable plan loan limit under Section 72(p) and permitting a suspension of loan repayments for plan loans outstanding on or after March 27, 2020 that are made to “qualified individuals.”

As authorized under the CARES Act, Notice 2020-50 expands the definition of “qualified individual,” which is used to determine who is eligible for a coronavirus-related distribution and CARES Act loan provisions. Prior to Notice 2020-50, a “qualified individual” for purposes of the CARES Act included only an individual

  • who is diagnosed, or whose spouse or dependent is diagnosed, with SARS-CoV-2 or coronavirus (COVID-19) using a Centers for Disease Control and Prevention (CDC) approved test; or
  • who experiences adverse financial consequences because of an inability to work due to quarantine, furlough, layoff, reduced hours, loss of childcare, or the closing or reduction of hours of a business owned or operated by the individual because of COVID-19.

Now, as expanded by Notice 2020-50, a qualified individual also includes an individual

  • 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  • the individual having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or a start date for a job delayed due to COVID-19;
  • the individual’s spouse or a member of the individual’s household (that is, someone who shares the individual’s principal residence) being quarantined, being furloughed or laid off, or having to work reduced hours 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childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or a start date for a job delayed due to COVID-19; or
  • the closing or reduction of hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.

By expanding the “adverse financial consequences” standard to include those experienced by a spouse or household member and to include pay reductions and job offer revisions and start date delays, this guidance offers greater access to plan distributions and will benefit participants looking for expanded availability now.

Expansion to the Definition of ‘Coronavirus-Related Distribution’

Pursuant to Notice 2020-50, a qualified individual is permitted, with certain exceptions, to designate any distribution that meets the requirements of a coronavirus-related distribution as such, regardless of whether the plan treated the distribution as a coronavirus-related distribution, so long as the total amount treated by the individual as a coronavirus-related distribution from all eligible retirement plans does not exceed $100,000.

The qualified individual is responsible for determining if he or she meets the requirements for a coronavirus-related distribution. Likewise, an employer is permitted to choose whether, and to what extent, to treat distributions under its plans as coronavirus-related distributions and can develop any reasonable procedures for identifying coronavirus-related distributions under its retirement plans. The plan must be consistent in its treatment of similar distributions.

Notice 2020-50 also clarifies that the definition of a “coronavirus-related distribution” under the CARES Act does not limit these distributions to amounts withdrawn solely to meet a need arising from COVID-19. Rather, coronavirus-related distributions are permitted without regard to the qualified individual’s need for funds, and the amount of the distribution need not be commensurate with the individual’s need.

Expansion to Rules Relating to Recontribution of Coronavirus-Related Distributions

If a coronavirus-related distribution is otherwise eligible for tax-free rollover treatment, a qualified individual is permitted, at any time in the three-year period beginning the day after the date of a coronavirus-related distribution, to recontribute any portion of the distribution to an eligible retirement plan.

Hardship distributions are generally not eligible for rollover treatment, but Notice 2020-50 provides that if a distribution meets the necessary requirements of a coronavirus-related distribution, then, unless it is related to a nonqualified deferred compensation plan, the distribution is not treated as made on account of hardship and any portion of the distribution is permitted to be recontributed to an eligible retirement plan accepting recontributions of coronavirus-related distributions.

Clarifications on Reporting Coronavirus-Related Distributions

Notice 2020-50 also provides helpful guidance and examples on how plans may report coronavirus-related distributions and how individuals will reflect the tax treatment of these distributions and rollovers on their individual tax returns. For example, qualified individuals may elect to report their coronavirus-related distributions ratably over a three-year period or include the full amount in income in the year of distribution by making an irrevocable election in their tax return for the year of distribution. The election must be the same for each coronavirus-related distribution received during the year, and the individual must also report the distribution on Form 8915-E. Qualified individuals will use Form 8915-E to report any recontribution made during the taxable year and to determine the amount of the coronavirus-related distribution includible in income for the taxable year.

An eligible retirement plan must report the payment of a coronavirus-related distribution to a qualified individual on Form 1099-R, even if the coronavirus-related distribution is recontributed to the same plan in the same year.

Application of CARES Act Section 2202 to Plan Loans

Notice 2020-50 also provides guidance regarding the application of Section 2202(b) of the CARES Act to plan loans. The guidance includes a safe harbor procedure for implementing the suspension of loan repayments otherwise due through the end of 2020, but notes that there may be other reasonable ways to administer these rules.

Under this safe harbor, a qualified employer plan will be treated as satisfying the requirements of Section 72(p) if a qualified individual’s obligation to repay a plan loan is suspended under the plan for any period beginning not earlier than March 27, 2020, and ending not later than December 31, 2020 (the Suspension Period). The loan repayments must resume after the end of the Suspension Period, and the term of the loan may be extended by one 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. This safe harbor eliminates uncertainty regarding the duration of loan suspensions and when suspended payments must resume.

Permitted Cancellation of Deferral Election Under Nonqualified Deferred Compensation Plan

There is also a surprising section of Notice 2020-50 addressing the cancellation of nonqualified plan deferral elections under Section 409A. In Section 6 of Notice 2020-50, the Internal Revenue Service indicates that a coronavirus-related distribution “will be considered a hardship distribution [under the 401(k) regulations] . . . for purposes of § 1.409A-3(j)(4)(viii).” That section of the regulations allows a nonqualified retirement plan to provide for the cancellation of a deferral election following a hardship distribution. Consequently, a nonqualified plan deferral election may be cancelled as a result of a coronavirus-related distribution.

Additional Guidance

Notice 2020-50 reemphasizes that employers can choose whether to implement these coronavirus-related distribution and loan rules, and notes that qualified individuals can claim the tax benefits of coronavirus-related distribution rules even if plan provisions are not changed.

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