The IRS recently released Notice 2020-50 (the “Notice”), which expands access to the penalty-free retirement plan distributions, plan loans and loan repayment relief permitted under the CARES Act for participants impacted by the coronavirus and clarifies related portions of the CARES Act. This article is intended to update our early analyses of the CARES Act’s impact on qualified retirement plans. Our analysis of the initial rule is available here. Our analysis of the initial IRS guidance, a set of FAQs, is here. A summary of some of the key updates provided by the Notice follows.
More Individuals Are Eligible to Take a Coronavirus Distribution and for Other CARES Act Relief
The Notice expands the group of individuals entitled to coronavirus-related distributions. The CARES Act allows “Qualified Individuals” to take “Coronavirus Distributions” of up to $100,000 from eligible retirement plans (such as qualified plans, 403(b) plans, 457 plans and IRAs) in 2020 without a 10% early withdrawal penalty, with the tax burden eligible to be spread out over three tax years. The CARES Act also provides a mechanism under which a Coronavirus Distribution may be recontributed on a pretax basis within three years to eligible plans via a rollover (“Coronavirus Recontributions”).
The CARES Act
defines Qualified Individuals as those diagnosed with COVID-19 by a CDC-approved test, those with a spouse or dependent(s) with the disease, or those experiencing financial consequences from quarantine, furlough, layoffs, the closing or reduction of hours of business, or being unable to work due to a lack of childcare. The Notice expands the definition of Qualified Individuals to include individuals who had adverse financial consequences due to the following:
- A reduction in pay (or self-employment income), a job offer rescinded, or a start date delayed due to COVID-19;
- A spouse (or someone who shares an individual’s principal residence) was quarantined, furloughed, or laid off, or, due to COVID-19, had work hours or pay reduced, a job offer rescinded, a start date delayed, or was unable to work due to a lack of childcare; or
- The closing or reduction in hours of a business owned or operated by the individual’s spouse (or someone who shares an individual’s principal residence) due to COVID-19.
In addition, the Notice permits this same expanded list of Qualified Individuals to benefit from the increased plan loan and plan loan repayment provisions of the CARES Act, which:
- Increase the limit on the plan loans that a Qualified Individual may receive without being taxed from $50,000 to $100,000, for any loan made within 180 days after enactment of the CARES Act (“Coronavirus Loans”); and
- Allow payments due from March 27, 2020 through December 31, 2020 on outstanding plan loans to be delayed for up to one year without the Qualified Individual being taxed on the loan amount (“Coronavirus Loan Suspensions”).
Guidance for Employer Reliance on Participant Certification
The CARES Act requires participants to certify that they are a Qualified Individual in order to receive a Coronavirus Distribution. The Notice provides a model form of certification that plans can use for this participant certification. In addition, the Notice allows the same model certification and certification procedures to apply to Coronavirus Loans, Coronavirus Loan Suspensions and Coronavirus Recontributions. The Notice indicates that a plan administrator may rely on a participant certification as long as the administrator does not have "actual knowledge" of information to the contrary. In this regard, the Notice clarifies that the "actual knowledge" requirement does not require the
administrator to inquire further as to the factual accuracy of the certification. Also, the model language makes clear that the participant certification does not have to specify the reason (i.e., category) which has caused the participant to be a Qualified Individual, which should reduce privacy concerns. While use of the model certification is not required, we expect that most plan sponsors and administrators will use it.
Guidance for Plans Making or Accepting Repayment of Coronavirus Distributions
The Notice provides guidance for plan administrators making Coronavirus Distributions or accepting Coronavirus Recontributions. If an eligible retirement plan makes a Coronavirus Distribution to a Qualified Individual, the distribution must be reported on Form 1099-R and
the plan may use distribution code 2 (early distribution, exception applies) or distribution code 1 (early distribution, no known exception) in box 7 as applicable (as long as the code is applied consistently). In order to permit a Qualified Individual to make a Coronavirus Recontribution, the plan administrator must reasonably conclude the contribution is eligible for direct rollover treatment under the CARES Act provisions. The administrator may, absent any actual knowledge to the contrary, rely on the employee’s initial Coronavirus Distribution certification in coming to its conclusion. Also, a Qualified Individual may make a Coronavirus Recontribution to any plan (such as an IRA) that accepts rollovers, not just to the specific plan that made the Coronavirus Distribution.
Coronavirus Loan Suspension Safe Harbor and Related
The Notice provides a safe harbor and additional guidance for qualified retirement plans regarding how to apply Coronavirus Loan Suspensions, when to require loan repayments to recommence and how to compute the remaining payments due. The safe harbor provides that a plan loan will satisfy Internal Revenue Code (“Code”) Section 72(p) (and thus the participant will avoid being taxed on the loan) as long as the suspension on repayments ends not later than December 31, 2020, and interest is accrued for the period that payments were suspended. In addition, the safe harbor allows the loan to be extended by up to one year from the date the loan was originally due to be repaid (even if such extension causes the loan term to extend beyond five years) and for the remaining loan balance as of December 31, 2020, including the interest accrued while payments were
suspended, to be reamortized over the remaining term of the loan, as extended. The IRS also acknowledged there may be other approaches outside of the safe harbor to allow for Coronavirus Loan Suspensions while also complying with Code Section 72(p), but we anticipate most plan sponsors and recordkeepers will view the safe harbor approach as the simplest one.
Permitted Cancellation of Nonqualified Deferred Compensation Plan Deferral Election
The Notice allows nonqualified deferred compensation plans subject to Code Section 409A to permit participants who receive Coronavirus Distributions under eligible retirement plans to cancel their deferral elections under the nonqualified deferred compensation plans.
Coronavirus Distributions, Coronavirus Loans and Coronavirus Loan Suspensions Are Optional for
Consistent with the FAQs, the Notice permits employers to decide whether to amend their plans to offer Coronavirus Distributions, Coronavirus Loans and Coronavirus Loan Suspensions. The Notice also indicates that while IRS anticipates plans will permit Coronavirus Recontributions, employers are not required to amend their plans or plan procedures to do so. Even if a plan does not specifically offer Coronavirus Distribution, though, a Qualified Individual may elect on their income tax return to treat up to $100,000 of distributions received between January 1, 2020 and December 31, 2020 from eligible plans as Coronavirus Distributions and receive the tax-favored treatment on them.
In light of this latest guidance, plan sponsors should continue to work with their ERISA counsel and recordkeepers and stay alert for further guidance with respect to
the CARES Act rules.