The U.S. Coronavirus Aid, Relief and Economic Security Act (CARES Act) provides relief to individuals facing hardship due to the COVID-19 crisis by permitting participants in qualified retirement plans to take special distributions and/or plan loans to help ease the economic fallout of the pandemic. On June 19, 2020, the Internal Revenue Service (IRS) issued Notice 2020-50, which provides guidance to both plan sponsors and plan participants regarding implementing some of the CARES Act’s retirement plan provisions. This Sidley Update provides an overview of Notice 2020-50, with particular focus on the sections affecting plan sponsors.
Summary of Relief Enacted by the CARES Act
The CARES Act permits “qualified individuals” to treat distributions from a qualified retirement plan as “coronavirus-related distributions” entitled to more favorable tax treatment. For example, “coronavirus-related distributions” are not subject to the 10 percent penalty generally applicable to early withdrawals or the 20 percent mandatory tax withholding applied to retirement plan distributions.
The CARES Act also permits plan sponsors to offer qualified individuals plan loans from an employer-sponsored retirement plan in an amount not exceeding the lesser of $100,000 or 100 percent of the individual’s vested account balance. This rule essentially doubles the amount that a qualified individual may request under the normal plan loan rules. In addition, plan sponsors are permitted to delay, for one year, any qualified individual’s loan repayment obligation occurring during the period beginning after the enactment of the CARES Act and ending December 31, 2020.
Guidance in Notice 2020-50
Expansion of the Definition of Qualified Individual
Under the CARES Act, a qualified individual includes any person who meets one or more of following criteria:
(1) Such person is diagnosed with COVID-19,
(2) such person’s spouse or dependent is diagnosed with COVID-19, or
(3) such person experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to COVID-19; inability to work due to lack of childcare resulting from COVID-19; or closing or reducing hours of a business owned or operated by him or her due to COVID-19.
After the CARES Act went into effect, a debate emerged as to whether a person satisfied the definition of “qualified individual” on account of his or her spouse experiencing any of the events identified in criterion three (3) above. Notice 2020-50 answers this question in the affirmative by expanding the definition of qualified individual to include any person who experiences a financial hardship due to their spouse or another member of their household experiencing any of the events identified in criterion three. A member of a person’s household is someone who shares his or her principal residence.
Notice 2020-50 also adds a new category to the definition of qualified individual. Under the notice, a person is a qualified individual if he or she (or his or her spouse, or a member of his or her household) has a reduction in pay (or self-employment income) or job offer rescinded or start date for a job delayed due to COVID-19.
The notice includes a sample certification that plan administrators may use when determining someone’s status as a qualified individual.
Administration of COVID-19-Related Distributions
Plans are not required to allow coronavirus-related distributions, but a qualified individual may elect to treat any permissible distribution as a coronavirus-related distribution. The total amount of any coronavirus-related distribution eligible for favorable tax treatment is limited to $100,000 per qualified individual. The CARES Act does not, however, limit the amount of the distribution to the demonstrated financial need of the qualified individual. Therefore, while plan sponsors must monitor the $100,000 limit with respect to distributions made under its plan and any plans maintained by a member of its controlled group, they do not need to seek any proof of financial need on the part of the qualified individual.
Qualified individuals may recontribute any portion of a coronavirus-related distribution that constitutes an “eligible rollover distribution” to any qualified retirement plan that accepts rollovers within a three-year period following the distribution. Notice 2020-50 clarifies that plans will not be held liable for mistakenly accepting the rollover of any coronavirus-related distribution that is subsequently determined not to be an eligible rollover distribution if the following two criteria are satisfied:
(1) The plan sponsor reasonably believed the amount contributed was eligible to be rolled over, and
(2) the plan sponsor disgorges the amount of the invalid rollover (plus earnings) upon learning that the contribution was not an eligible rollover contribution.
Recipients of coronavirus-related distributions may elect to report amounts attributable to such distributions in their gross income either during the year in which they received the distribution or ratably over a three-year period. The rules for reporting coronavirus-related distributions are addressed in detail in Notice 2020-50 but are not addressed in this Sidley Update. Recipients of coronavirus-related distributions are encouraged to consult their tax adviser for guidance on this subject.
Plan Loans
The CARES Act permits a plan sponsor to delay the due date of any repayment of an outstanding plan loan held by a qualified individual for one year if such due date occurs between March 27 and December 31, 2020. Notice 2020-50 clarifies that the option to suspend loan due dates is optional rather than mandatory and provides a safe harbor whereby plans will be deemed to satisfy the one-year delay authorized by the CARES Act. Under the safe harbor, if a qualified individual’s repayment obligation is suspended as allowed under the CARES Act, the loan repayments must resume at the end of the applicable suspension period and the term of the loan may be extended up to one year from the date the loan was originally due (even if such extension causes the total repayment period to extend beyond five years). The loan must also be reamortized to take into account the extended repayment period, and interest accrued during the suspension period must be added to the outstanding loan balance. The notice explicitly acknowledges, however, that there may be other reasonable, if not more complex, ways to administer the loan suspension provision but makes clear that loan repayments must resume after December 31, 2020.
Cancellation of Deferrals Under a Nonqualified Deferred Compensation Plan
A nonqualified deferred compensation plan may permit a service provider to cancel his or her deferral election due to an unforeseeable emergency or financial hardship. Notice 2020-50 provides that if a service provider receives a coronavirus-related distribution, such distribution will be considered a hardship distribution for the purposes of the applicable Internal Revenue Code Section 409A regulations. Thus, such service provider may elect to cancel his or her deferral election on the basis of receiving the distribution.
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