CARES Act -- IRS Provides Retirement Plans with Additional Guidance and Clarifications

June 23, 2020

By Peter Alwardt, CPA

On June 19, the IRS issued Notice 2020-50 (“Notice”), which extends relief to retirement plan participants whose spouses are laid off and who take COVID-19 related distributions or loans from their retirement accounts as well as providing new safe harbors for loan repayments.  The Notice expands the categories of individuals eligible for these types of distributions and loans and provides additional guidance regarding how “qualified individuals” and plan sponsors will comply with the retirement plan provisions of the CARES Act (“Act”).

The Notice is intended to help retirement plan participants affected by COVID-19 take advantage of the Act provisions providing additional situations that permit access to plan distributions and plan loans (see our Alert on the CARES Act Retirement Plan Provisions). The Notice also provides specific guidance related to the special tax treatment of distributions and loans under the Act for qualified individuals and retirement plans.

Specifically, the Notice expands the definition “qualified individual” (see previous Alert for complete definition) to take into account additional situations such as:

  1. The individual having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19;
  2. The individual’s spouse or a member of the individual’s household (as defined below) 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childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19; or having a job offer rescinded or start date for a job delayed due to COVID-19; or
  3. 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.

For purposes of applying these additional situations, a member of the individual’s household is someone who shares the individual’s principal residence.

Treatment of Distributions to Plan Participants

The Notice provides that a plan participant must be a “qualified individual” as noted above in order to obtain the favorable tax treatment provided under the Act.  Specifically, a qualified individual is permitted to designate as a COVID-19 related distribution any distribution from a retirement plan made on or after January 1, 2020 and before December 31, 2020 provided that the amount of aggregate distributions from all retirement plans that can be treated as COVID-19 related distributions does not exceed $100,000. This designation is allowed to be made with respect to any distribution to a qualified individual that would meet the requirements of a COVID-19 related distribution without regard to whether the retirement plan, in which the qualified individual participates, has treated the distribution as a COVID-19 related distribution. Accordingly, required minimum distributions that would have been eligible for waiver under the Act, but have been received by a qualified individual on or after January 1, 2020 and before December 31, 2020, are permitted to be treated as COVID-19-related distributions and, therefore, permitted to be included in income ratably over three years.  Similarly, any distribution received by a qualified individual as a beneficiary can be treated as a COVID-19 related distribution. Additionally, a qualified plan loan offset of a qualified individual’s plan account balance used to repay a plan loan is permitted to be treated as a COVID-19 related distribution. Finally, the Notice provides guidance and examples related to the tax reporting for qualified individuals, which are beyond the scope of this Alert.

Guidance Related to Plan Sponsors

Plan Sponsor Implementation of Act Provisions

Under the Notice, a plan sponsor is permitted to choose whether to treat distributions under its plan as COVID-19 related distributions and whether to apply the COVID-19 related plan loan rules to its plan. For example, a plan sponsor may choose to provide for COVID-19 related distributions, but choose not to change its plan loan provisions or loan repayment schedules as permitted under the Act.   Also, a plan sponsor is permitted to develop any reasonable procedures for identifying which distributions are treated as COVID-19 related distributions under its retirement plan.  It should be noted that if in the plan in which a qualified individual participates, a distribution is not treated as a COVID-19 related distribution, a qualified individual may treat a distribution as a COVID-19 related distribution on the individual's federal income tax return provided they meet the requirements of this Notice.

Determination of $100,000 Limit

The Notice provides that for purposes of determining the $100,000 limit on COVID-19 related distributions, the term “employer” means the plan sponsor maintaining the plan and all related employers required to be aggregated with the plan sponsor under the controlled group rules of IRC Secs. 414(b), (c), (m), or (o). However, a plan will not violate any requirement of the IRC due to a qualified individual’s total COVID-19 related distributions exceeding $100,000 after taking into account distributions from their IRAs or other retirement plans maintained by unrelated employers.

Plan Participant Certifications

The plan sponsor of an eligible retirement plan may rely on the plan participant’s certification that the individual satisfies the conditions to be a qualified individual in determining whether a distribution is a COVID-19 related distribution unless the plan sponsor has actual knowledge to the contrary. The Notice states that the requirement that a plan sponsor not have actual knowledge that is contrary to an individual’s certification does not mean that the plan sponsor has an obligation to inquire into whether an individual has satisfied the requirements to be treated as a qualified individual. Rather, this requirement is limited to situations in which the plan sponsor already possesses sufficient information to determine the accuracy of the participant’s certification.

The Notice provides a sample certification that may be used by plan sponsors and plan participants.

Tax Reporting of COVID-19 Related Distributions

A retirement plan must report the payment of a COVID-19 related distribution to a qualified individual on Form 1099-R, ”Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.”  This reporting is required even if the qualified individual recontributes the COVID-19 related distribution to the same retirement plan in the same year. If a plan is treating the payment as a COVID-19 related distribution and no other appropriate code applies, the payor is permitted to use distribution code 2 (early distribution, exception applies) in box 7 of Form 1099-R. However, a payor also is permitted to use distribution code 1 (early distribution, no known exception) in box 7 of Form 1099-R.

Recontribution of COVID-19 Related Distributions

Under the Notice, a qualified individual who receives a COVID-19 related distribution that is eligible for tax-free rollover treatment is permitted to recontribute, at any time during a three-year period, any portion of the distribution to an eligible retirement plan that accepts eligible rollover contributions.  The plan sponsor may rely on the certification of the qualified individual that the amount of the recontribution meets the requirements of the Act.  Accordingly, it is anticipated that eligible retirement plans will accept recontributions of COVID-19 related distributions, which are to be treated as rollover contributions. However, retirement plans are not required to accept rollover contributions. Thus, if a retirement plan, by its terms, does not accept any rollover contributions, the plan is not required to amend its terms or procedures to accept recontributions of COVID-19 related distributions.

Suspension and Extension of Loan Repayments

The Act provides for a special rule if a qualified individual has an outstanding loan from a qualified employer plan on or after March 27, 2020. In the case of a qualified individual with a loan from an employer plan that was outstanding on or after March 27, 2020, for any repayment with respect to the loan that is due during the period beginning on March 27, 2020 and ending on December 31, 2020, the payment due date may be delayed for one year. Thus, an plan sponsor is permitted to choose to allow this delay in loan repayments under its plan with respect to qualified individuals, and, if it does, there will not be a deemed distribution to those qualified individuals due to the delay.

The Notice provides a safe harbor for satisfying the retirement provisions of the Act.  Under the safe harbor, a qualified retirement plan will be treated as meeting the requirements of the Act 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 (“suspension period”). The loan repayments must resume after the end of the suspension period, i.e., January 1, 2021, and the term of the loan may be extended by up to 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.  A plan satisfies these rules if the loan is reamortized and repaid in substantially level installments over the remaining period of the loan, plus up to one year from the date the loan was originally due to be repaid.  

Conclusion

The Notice provides welcome guidance to both qualified individuals and retirement plan sponsors for complying with the provisions of the Act and the tax reporting related to distributions from plans.

About Peter Alwardt

Peter Alwardt is a Tax Partner specializing in employee benefits, tax and ERISA issues for domestic and international clients. He is a member of the American Institute of Certified Public Accountants and NY State Society of CPAs.