The Coronavirus Aid, Relief, and Economic Security Act (the ‘‘CARES Act’’) allows qualified retirement plans to permit participants affected by COVID-19 to (1) withdraw up to $100,000 from their eligible retirement plan accounts without penalty and with delayed taxation, (2) take plan loans under higher loan limits, and (3) postpone loan payments in 2020. On May 4, 2020, the IRS released FAQs confirming that these CARES Act provisions are optional for employers.
Now, IRS Notice 2020-50 provides an expansion of the definition of “qualified individual” and additional welcome guidance to help employers, plans, and individuals affected by COVID-19. This alert focuses on the provisions applicable to plan sponsors and plan administrators.
Definition of “Qualified Individual”
Plans may make CARES Act coronavirus-related distributions (“CRDs”) and loan relief available to a “Qualified Individual,” defined as an individual who: (1) is diagnosed with COVID-19 or whose spouse or dependent is diagnosed with COVID-19, or (2) experiences adverse financial consequences as a result of specific circumstances listed in the CARES Act related to COVID-19.
Notice 2020-50 expands the specific circumstances causing adverse financial consequences that must occur for an individual to be a Qualified Individual. As a result of these changes, a Qualified Individual now includes an individual who experiences adverse financial consequences as a result of the individual, the individual's spouse, or a member of the individual's household:
- 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;
- 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- having a job offer rescinded or start date for a job delayed due to COVID-19.
A member of the individual’s household is defined as someone who shares the individual’s principal residence.
Guidance for Plans Making CRDs
The Notice confirms that standard distribution notices, such as the direct rollover notice and 402(f) notice, and the 20% withholding requirement do not apply to a CRD. The plan must report the full amount of a CRD on Form 1099-R in the year of distribution, even if the participant recontributes all or part of the CRD in the same year.
Guidance for Plans Accepting Recontribution of CRDs
The Notice affirms that if a plan does not accept any rollover contributions, it is not required to allow recontributions of CRDs. For plans that accept rollover contributions, recontributions of CRDs are to be treated as rollover contributions. If a plan accepts recontribution of CRDs, the plan administrator must reasonably conclude that the recontributed amount is eligible for recontribution under the CARES Act provisions.
Guidance on Tax Treatment for Qualified Individuals
A Qualified Individual, including a beneficiary, may elect to designate a distribution that meets the requirements for a CRD as a CRD on their personal federal tax return, regardless of how the distribution is reported by the plan. CRDs are taxable ratably over a three-year period, unless the Qualified Individual elects to report and pay the tax in the year of distribution. And a Qualified Individual may repay a CRD any time within three years of the date of distribution. The Notice provides guidance to individuals about the tax treatment and reporting of CRDs and their repayment, with numerous helpful examples.
Safe Harbor for Reamortizing Plan Loans
The Notice provides that plan sponsors that decide to adopt the CARES Act relief can choose the extent to which it is adopted. Plans may permit suspension by Qualified Individuals of loan payments otherwise due during the period from March 27, 2020 through December 31, 2020 for up to one year.
The Notice provides a safe harbor method for reamortizing loans under the CARES Act. Under the safe harbor:
- Interest accrued during the suspension period is added to the balance of the loan before the loan is reamortized.
- When the suspension ends (no later than December 31, 2020), payments resume with the amount of each payment to be determined by reamortizing the loan amount (including accrued interest) to provide for substantially level installments over the original loan period, plus up to one year from the date the loan was originally due to be repaid.
- The term of the loan may be extended by up to one year from the date the loan was originally due to be repaid, even if the term of the loan is extended beyond five years (for non-primary residence loans).
The Notice explicitly provides that use of the safe harbor is not required, and there may be other reasonable ways to administer the CARES Act loan suspension rules.
Reliance on Self-Certification
The Notice confirms that the plan administrator may rely on a participant’s certification to determine whether an individual is a Qualified Individual, unless the administrator has actual knowledge to the contrary. The administrator is not required to inquire. The Notice provides sample text for an acceptable certification.
Nonqualified Plan Impact
A nonqualified deferred compensation plan subject to Code § 409A may provide for cancellation of a service provider’s deferral election due to an unforeseeable emergency or a hardship distribution under the 401(k) regulations. The Notice specifies that a CRD will be considered a hardship distribution for this purpose; the deferral election must be cancelled, not merely postponed or delayed.