IRS Issues Additional CARES Act Guidance for Retirement Plans

The Internal Revenue Service (IRS) recently issued two Notices (Notice 2020-50 and Notice 2020-51) that clarify and, in some cases, broaden the scope of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) with respect to retirement plans.

As further detailed in our earlier memo (available here), the CARES Act:

• Provides for “coronavirus-related distributions” from tax-qualified retirement plans, generally allowing participants affected by COVID-19 or the resulting economic downturn to gain access to some of their retirement savings without tax penalties and which distributions have certain advantageous tax treatment
  
  
• Increases the allowable plan loan amounts for participants affected by COVID-19 or the resulting economic downturn and permits the suspension of certain loan payments and the extension of the loan term
  
  
• Waives the minimum distribution requirements for calendar year 2020

Following the passage of the CARES Act, the IRS, in FAQs published in May, made clear that these provisions are optional for plan sponsors. The Notices provide additional guidance for plan sponsors, administrators and participants on the qualifications needed for these distributions as well as their reporting and withholding obligations and tax treatment.

Qualified Individuals

The CARES Act provisions relating to coronavirus-related distributions and plan loans apply only to distributions and loans made to “qualified individuals.” Under the CARES Act, a qualified individual is an individual:

• Who is diagnosed, or whose spouse or dependent (as defined in Section 152 of the Internal Revenue Code (Code)) is diagnosed, with COVID-19 by a CDC-approved test, or
  
  
• Who experiences adverse financial consequences as a result of:
  
  
  • Being quarantined, furloughed or laid off or having work hours reduced due to COVID-19
    
    
  • Being unable to work due to lack of child care due to COVID-19
    
    
  • The closing or reduced hours of a business owned or operated by the individual due to COVID-19

Notice 2020-50 expands the definition of “qualified individual” for these purposes to also include an individual who experiences adverse financial consequences as a result of:

• Having a reduction in pay (or self-employment income) due to COVID-19
  
  
• Having a job offer rescinded or start date for a job delayed due to COVID-19
  
  
• The individual’s spouse or a member of the individual’s “household” being quarantined, furloughed or laid off or having work hours reduced, being unable to work due to lack of child care, having a reduction in pay (or self-employment income), or having a job offer rescinded or start date for a job delayed due to COVID-19, or
  
  
• The closing or reduced hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19

Member of the individual’s "household” is defined as someone who shares the individual’s principal residence.

Coronavirus-Related Distributions

Coronavirus-related distributions are not subject to the 10 percent additional tax (or the 25 percent additional tax for certain distributions from SIMPLE IRAs) on early distribution. In addition, a qualified individual is permitted to delay the payment of income tax on the distribution by paying the tax ratably over a three-year period. A coronavirus-related distribution may also generally be repaid to the plan or rolled over to another eligible retirement plan, including an IRA, over a three-year period commencing after the distribution is received.

Eligible distributions. Notice 2020-50 clarifies that even if a plan sponsor does not amend its plan to provide for coronavirus-related distributions, qualified individuals who receive distributions in 2020 are able to designate up to $100,000 of distributions (from all plans) as a coronavirus-related distribution and thus receive the favorable tax benefits of such distributions. The guidance further provides that although such distributions can be treated as coronavirus-related distributions, such distributions only may be recontributed to an eligible retirement plan if they are otherwise eligible for tax-free rollover. For example, certain periodic payments and distributions that would have been required minimum distributions but for the CARES Act waiver of such required minimum distributions in 2020 and a distribution received by a qualified individual as a beneficiary may be treated as coronavirus-related distributions. However, distributions received by beneficiaries other than a surviving spouse are not eligible to be repaid or recontributed to another plan.

Corrective distributions of elective deferrals that are returned to comply with the limitation under Section 415 of the Code, excess contributions under Section 401(k) of the Code and excess elective deferrals under Section 402(g) of the Code, loans treated as deemed distributions pursuant to Section 72(p) of the Code, and dividends on employer securities under Section 404(k) of the Code, are some of the distributions that are not permitted to be treated as coronavirus-related distributions.

Coronavirus-related distributions are not needs-based. Notice 2020-50 further clarifies that coronavirus-related distributions need not correspond to a need arising from COVID-19. For example, an individual who is a qualified individual due to experiencing adverse financial consequences related to COVID-19 may receive coronavirus-related distributions without regard to his or her need for funds, and the amount of the distribution need not correspond to the extent of the adverse financial consequences he or she experienced.

Withholding, reporting and tax treatment. Coronavirus-related distributions should be reported on an individual’s 2020 Form 1099-R, using code 1 or 2 in box 7. The plan is not required to provide a 402(f) notice or withhold 20 percent of the distribution; however, the distribution is subject to voluntary withholding.

An individual receiving a coronavirus-related distribution may either include the taxable portion of the distribution in income ratably over a three-year period beginning with the year of distribution or include the entire amount of the taxable portion of the distribution in income in the year of distribution. An election cannot be made or changed after the timely filing of the individual’s tax return for the year of the distribution. If a participant elects to include the entire distribution in income for the year of distribution and later recontributes any portion of the distribution, the amount of the recontribution will reduce the distributions. This amount would be reported on Form 8915-E.

Plan Loans

The CARES Act increases the amount that a qualified individual may borrow from a qualified retirement plan and permits the plan to delay certain plan loan payments and extend the loan repayment period.

Notice 2020-50 provides a safe harbor for determining the subsequent payment amounts after a delay in loan payments permitted under the CARES Act. Specifically, the Notice provides that the safe harbor is met if

• The loan payments are suspended for any period beginning not earlier than March 27, 2020, and ending not later than Dec. 31, 2020 (the suspension period)
  
  
• The loan repayments resume after the end of the suspension period
  
  
• The term of the loan is extended by up to one year from the date the loan was originally due to be repaid, and
  
  
• The interest that accrued during the suspension period is added to the remaining principal loan balance, which is satisfied if the loan is reamortized and repaid in substantially level installments over the remaining loan period (e.g., five years from the date of the loan plus up to one year)

While Notice 2020-50 includes this safe harbor, it also acknowledges that there may be other reasonable ways to administer this provision of the CARES Act. Plan sponsors and administrators should carefully review any approach that does not satisfy this safe harbor to determine whether it is appropriate and advisable.

Employee Certifications for Coronavirus-Related Distributions and Plan Loans

The CARES Act provides that, absent actual knowledge to the contrary, a plan sponsor may rely on an individual’s certification that he or she satisfies the requirements of a qualified individual with respect to coronavirus-related distributions. Notice 2020-50 extends this rule to the CARES Act loan provisions and further clarifies that employers are not obligated to inquire as to the accuracy of the certification. Notice 2020-50 also includes a form of certification that can be used in connection with such distributions and loans.

Required Minimum Distributions

The CARES Act waived the requirement to make required minimum distributions (RMDs) in 2020. Notice 2020-51 provides additional relief with respect to this waiver to allow participants to take advantage of these provisions, consistent with the legislative intent.

Rollover of RMD amounts. The Notice provides that distributions that would have been RMDs but for the CARES Act waiver may be rolled over into an eligible plan. This includes

• Distributions paid in 2020 (or paid in 2021 for the 2020 calendar year in the case of an individual who has a required beginning date of April 1, 2021) if the payments (i) equal the amount that would have been RMDs in or for 2020 but for the CARES Act waiver or (ii) are one or more payments (that include the 2020 RMDs) as part of a series of substantially equal periodic payments made at least annually for the life of the participant (or joint lives of a participant and beneficiary) or for a period of at least ten years, and
  
  
• For a plan participant with a required beginning date of April 1, 2021, distributions that are paid in 2021 that would be RMDs for 2021 absent the CARES Act waivers

Extension of rollover period. Ordinarily, plan participants have 60 days in which to roll over a distribution. However, plan participants may have received distributions in early 2020 that were intended to be RMDs but, subsequent to adoption of the CARES Act, became eligible to be rolled over and for which the 60-day period has passed. To enable rollovers, Notice 2020-51 extends until Aug. 31, 2020, the 60-day period for any distribution that is now permitted to be rolled over due to the waiver of RMD requirements.

Repayment to IRA. Similar to the rollover rules, if an individual received a distribution from an IRA that would have been an RMD but for the CARES Act, the distribution may be repaid to the IRA, and for this purpose as well, the 60-day period is extended to Aug. 31, 2020.

Under Notice 2020-50, these amounts could be recontributed to an eligible plan within three years of the distribution to the extent that the distribution qualifies as a coronavirus-related distribution.

Notice 2020-51 also includes Q&As that address additional points related to the CARES Act RMD waiver.

Plan Amendments

If plan sponsors implement the CARES Act provisions, including to reflect the RMD provisions, the plans must be amended no later than the last day of the first plan year beginning on or after Jan. 1, 2022. Notice 2020-51 includes a sample amendment for purposes of the RMD waiver.