IRS Issues Additional Guidance on Coronavirus-Related Distributions and Plan Loans under CARES Act
On Friday, June 19, 2020, the IRS released Notice 2020-50 which provides additional guidance regarding the coronavirus-related distributions (“CRDs”) and coronavirus-related loans and loan repayment delays (“CR Loan Relief”) made available to certain retirement plan participants affected by COVID-19 under the CARES Act. The notice expands, and in some cases modifies, previous guidance issued by the IRS regarding CRDs and CRD Loan Relief discussed in our recent blog. Discussion of the material information contained in the notice is provided below.
Expanded Definition of “Qualified Individual” Eligible for CRDs and CR Loan Relief
Notice 2020-50 expands the definition of “qualified individual” (an individual eligible for CRDs or CR Loan Relief) to take into account additional factors such as reductions in pay, rescissions of job offers, and delayed start dates with respect to an individual, as well as adverse financial consequences to an individual arising from the impact of COVID-19 on the individual’s spouse or household member.
Under the expanded definition provided under Notice 2020-50, “qualified individual” is now defined as an individual who:
- is diagnosed, or whose spouse or dependent is diagnosed with COVID-19 by certain approved tests; or
- experiences adverse financial consequences as a result of the individual, the individual’s spouse, or a member of the individual’s household (that is, someone who shares the individual’s principal residence):
- being quarantined, 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;
- closing or reducing hours of a business that they own or operate due to COVID-19;
- having pay or self-employment income reduced due to COVID-19; or
- having a job offer rescinded or start date for a job delayed due to COVID-19.
The notice clarifies that plan administrators can rely on an individual’s certification that the individual is a qualified individual (unless the plan administrator has actual knowledge to the contrary), but also notes that an individual must actually be a qualified individual in order to obtain favorable tax treatment with respect to a CRD. The notice provides a sample certification that may be used by an individual to certify that they satisfy the conditions to be a qualified individual.
Distributions that may be treated as CRDs
In Notice 2020-50, the IRS confirms that, in general, a qualified individual is permitted to designate a distribution satisfying the applicable CARES Act requirements as a CRD without regard to whether the plan treats the distribution as a CRD. Notice 2020-50 further clarifies that the amount of a CRD is not limited to amounts withdrawn solely to meet a need arising from COVID-19. Thus, an individual who is a qualified individual is permitted to take CRDs up to the $100,000 limit regardless of the individual’s need for the funds.
Direct Rollover, Notice and Withholding Requirements Not Applicable to CRDs
The notice and prior guidance provide that a plan is not required to treat a plan distribution meeting the applicable requirements as a CRD. The notice clarifies that if a plan elects to treat a distribution as a CRD, the rules for eligible rollover distributions do not apply and the plan is not required to offer the individual a direct rollover with respect to the distribution and the plan administrator is not required to provide the individual with a 402(f) notice. In addition, the CRD is not subject to the 20% withholding requirement normally applicable, but the voluntary withholding requirements continue to apply.
Safe Harbor for Suspension of Loan Repayments
Under the CARES Act, a plan may permit a delay in certain loan repayments (generally, loan repayments with a due date between March 27, 2020 and December 31, 2020) without causing the loans to be treated as a deemed distribution under Code § 72(p). For plans providing qualified individuals with this repayment relief, the notice provides a safe harbor to satisfy the CARES Act requirements and avoid a deemed distribution.
Under the safe harbor, a qualified individual will not be treated as having a deemed distribution if:
- the 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”);
- loan repayments resume after the end of the Suspension Period 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 is added to the remaining principal on the loan; and
- the loan is reamortized and repaid in substantially level installments over the remaining period of the loan.
Use of the safe harbor is not required, and the IRS has acknowledged that there may be additional reasonable methods for administering the suspension of loan repayments.
Plans Accepting Recontribution of CRDs
Under the CARES Act, a qualified individual who receives a CRD that is eligible for tax-free rollover treatment is generally permitted to recontribute, at any time within the 3-year period beginning on the day after the date on which the distribution is received, any portion of the CRD (but not an amount in excess of the amount of the distribution), to an eligible retirement plan that accepts eligible rollover contributions. A plan administrator may rely on an individual’s certification that they are a qualified individual in determining whether the recontributed amount was a CRD, unless the administrator has actual knowledge to the contrary.
Tax Reporting of CRDs by Eligible Retirement Plans
Notice 2020-50 details the reporting procedures for eligible retirement plans that issue CRDs. If an eligible retirement plan makes a CRD, the plan must report the distribution on Form 1099-R even if the individual recontributes the CRD to the same plan in the same year. If no other appropriate code applies to the distribution, the plan is permitted to use distribution code 2 (early distribution, exception applies) or distribution code 1 (early distribution, no known exception) in box 7 of Form 1099-R.
Tax Reporting of CRDs by Qualified Individuals
Notice 2020-50 provides a detailed discussion of the reporting requirements and tax consequences applicable to qualified individuals that receive CRDs. In general, a qualified individual is permitted to designate any distribution satisfying the applicable requirements as a CRD (without regard to whether the plan treated the distribution as a CRD) by reporting the distribution on the individual’s federal income tax return and on Form 8915-E (Qualified 2020 Disaster Retirement Plan Distributions and Repayments).
Qualified individuals designating amounts as CRDs have two options for including the taxable portion of the CRD in his or her income: (1) include the taxable portion of the distribution in income ratably over a 3-year period; or (2) elect out of the 3-year ratable income inclusion and include the entire amount of the taxable portion of the CRD in the year of distribution. An election cannot be made or changed after the timely filing of the individual’s federal income tax return (including extensions) for the year of distribution, and all CRDs received in a taxable year must be treated consistently (either all distributions must be including in income over a 3-year period or all distributions must be included in income in the current year).
If a qualified individual elects to recontribute any portion of the CRD during the 3-year period beginning on the day after the date the CRD is received, the reporting requirements and applicable tax consequences vary depending on whether the individual uses the 1-year or 3-year inclusion method with respect to the CRD and whether the recontribution is made before or after the individual files his or her federal income tax return for the applicable tax-year. Special rules also apply for qualified individuals who use the 3-year income inclusion method with respect to a CRD if the individual dies before the full taxable amount of the CRD has been included in the individual’s gross income.
 As we noted in a recent blog, under previous IRS guidance, a “qualified individual” did not include an individual that experienced adverse financial consequences attributable to a spouse’s loss of income due to coronavirus-related quarantine, furlough, layoff, reduced hours, inability to work due to lack of child care, or closing of a spouse’s business or reduced hours of a spouse’s business. The definition of qualified individual, as expanded by Notice 2020-50, now includes these individuals.
Contact Nick Bertron for more information.