IRS Issues Additional CARES Act Guidance for Retirement Plan Administrators and Qualified Individuals

The Internal Revenue Service (IRS) recently released two notices that provide additional guidance for retirement plan administrators and qualified individuals about the special distribution, plan loan, and required minimum distribution (RMD) provisions under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. IRS Notice 2020-50 is focused primarily on “coronavirus-related distributions” (CRDs) and plan loans. IRS Notice 2020-51 provides guidance on the waiver of RMDs.

CARES Act Provisions and Prior Guidance

As discussed in our prior articles on the CARES Act’s relief for retirement plan participants and sponsors, and the subsequent IRS guidance issued in May 2020, the CARES Act allows qualified individuals to take CRDs, allows for increased plan loans and suspension of plan loan repayments, and provides for a waiver of 2020 RMDs. Under the CARES Act, qualified individuals can take CRDs of up to $100,000 from their tax-qualified retirement plans and/or individual retirement accounts (IRAs) in 2020 without being subject to the additional 10 percent excise tax for distribution prior to age 59½. In addition, CRDs can be included in taxable income ratably over a three-year period and can be recontributed to a qualified retirement plan or IRA within three years after the distribution date.

Also, CARES Act provisions increase the maximum plan loan amount from $50,000 to $100,000 for loans made to qualified individuals between March 27, 2020, and September 22, 2020, and allow for a one-year suspension of plan loan repayments that are due between March 27, 2020, and December 31, 2020. Further, the CARES Act allows for waiver of all 2020 RMDs from defined contribution plans and IRAs.

“Qualified Individual” Definition Expanded

In Notice 2020-50, the IRS expands the availability of CRDs and plan loan changes by expanding the definition of “qualified individual” to include those “who experience[] adverse financial consequences” due to reduction in pay (or self-employment income), rescission of a job offer, or delayed employment start date due to the coronavirus. An individual who experiences adverse financial consequences due to the impact of the coronavirus on his or her spouse or household member is also included under the expanded definition of “qualified individual.” The expanded definition of “qualified individual” also includes anyone who:

• is diagnosed, or whose spouse or dependent is diagnosed, with COVID-19 by a test approved by the U.S. Centers for Disease Control and Prevention (CDC) “(including a test authorized under the Federal Food, Drug, and Cosmetic Act)”; 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 owned or operated by the individual 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.

Qualified Individual’s Self-Certification

IRS Notice 2020-50 also confirms that a plan administrator “may rely on an individual’s certification that the individual satisfies the conditions to be a qualified individual” for purposes of the CARES Act CRD and plan loan provisions “unless the administrator has actual knowledge to the contrary.” The administrator is not obligated to inquire or investigate whether the certification is correct before making or reporting a CRD, applying the special loan provisions, or accepting a CRD repayment. However, an individual is only entitled to the tax relief provided by the CARES Act if the individual actually meets the conditions to be a qualified individual. A sample certification is included in IRS Notice 2020-50.

Employer Discretion Confirmed

Notice 2020-50 confirms that employers are not required to offer special CRD options for qualified individuals or, if offered, can choose to limit CRD options to amounts less than the maximum of $100,000 permitted under the CARES Act. Notice 2020-50 also confirms that employers can choose whether and to what extent to increase the amount of loans permitted under their plans and can choose whether to suspend loan repayments. Please note, however, that not all service providers are as flexible as the IRS, and may offer only a “take-it-or-leave-it” approach that does not allow the employer to adopt a CRD or plan loan limit that is lower than the $100,000 maximum.

Coronavirus-Related Distribution Clarifications

Notice 2020-50 confirms that eligible rollover distributions made in 2020 can be treated as CRDs even if not designated as CRDs at the time of distribution. This includes distributions that would have been RMDs but for the CARES Act waiver and periodic payments, as well as distributions made to a qualified individual under an eligible retirement plan’s standard distribution provisions. Distributions received by a qualified individual as a beneficiary, as well as hardship withdrawals and plan loan offset amounts for qualified individuals, can also be treated as CRDs.

In addition, Notice 2020-50 confirms that in connection with a CRD, employers are not required to offer a direct rollover for a CRD, provide a § 402(f) rollover notice, or apply 20 percent withholding that would usually be required for an eligible rollover distribution.

However, qualified individuals can treat most distributions made from an eligible retirement plan or IRA in 2020 (up to $100,000 in the aggregate) as a CRD by filing Form 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments, with their 2020 individual income tax return, whether or not the distributing plan treated the distribution as a CRD. There are a few exceptions that cannot be treated as CRDs, including:

• deemed distributions due to plan loan default;
• corrective distributions of contributions made in excess of the Internal Revenue Code’s annual deferral or annual addition limits; and
• amounts refunded to highly compensated employees to correct for failed nondiscrimination tests.

Notably, the IRS emphasized that the CARES Act does not limit CRDs to amounts withdrawn solely to meet a need arising from COVID-19.

CRDs may be included in income ratably over three years; however, a qualified individual can elect to include the entire amount of the CRD(s) received in income in the year received. Notice 2020-50 states that all CRDs received by a qualified individual in a taxable year must be treated consistently—either all included ratably over three years or all included in income within the current year.

The CARES Act also provided for recontribution of most CRDs, other than amounts received by nonspouse beneficiaries, to an eligible retirement plan or IRA within three years after the distribution date. Notice 2020-50 confirms that a plan administrator can rely on an individual’s certification that conditions to be a qualified individual were satisfied and accept a recontribution as an eligible rollover contribution unless the administrator has actual knowledge to the contrary. Notice 2020-50 also states that, although eligible retirement plans are generally not required to accept rollover contributions or to change their terms or procedures to accept CRD recontributions, it is anticipated that eligible retirement plans that already accept incoming rollover contributions will accept recontribution of CRDs and treat them as rollover contributions.

Additional guidance about tax reporting and income inclusion is provided in Notice 2020-50 for qualified individuals receiving CRDs.

Retirement Plan Loans

In addition to confirming that employers can choose whether and to what extent they want to implement increased limits for plan loans made to qualified individuals from March 27, 2020, through September 22, 2020, and/or suspend repayments for qualified individuals’ outstanding plan loans for some or all of the period from March 27, 2020, through December 31, 2020, Notice 2020-50 provides clarification about how the loan repayment suspension provisions can be implemented.

If a plan sponsor elects to allow for a loan repayment suspension, the loan repayment term for a qualified individual whose repayments are suspended can be extended for up to one year after the original repayment term, even if that extends the loan term beyond the normal five-year maximum limit. Under this safe harbor provision, no repayments need to be made during the suspension period that ends no later than December 31, 2020. The repayments must resume on the first scheduled repayment date following the suspension period (January 2021, assuming the suspension period lasts until December 31, 2020) with a reamortized payment amount that takes into account additional interest accrued during the suspension period and the extended loan repayment term for up to one year. Notice 2020-50 also acknowledges that there are alternative approaches to implementing the plan loan repayment suspension that are permissible. Payments can resume in January 2021 but the reamortization could commence April 1, 2021, which is one year from the beginning of the suspension period beginning March 27, 2020. As noted above, service providers and payroll systems may not be as flexible as the IRS guidance allows, so it will be important to consider discussing the available options with your service provider before adopting an implementation strategy.

Suspension of Nonqualified Deferred Compensation Elections

Under Notice 2020-50, a nonqualified deferred compensation plan can allow participants who receive a CRD from an eligible retirement plan to cancel their nonqualified deferral election for the remainder of 2020. All nonqualified deferrals for these participants must be cancelled prospectively, not just reduced or delayed. A plan sponsor can choose to make this deferral cancelation mandatory for any participant who receives a CRD, to make cancellation available as an option for any participants who receives a CRD, or to maintain the annual deferral elections made by participants without regard to their receipt of a CRD. It is not necessary to amend the nonqualified deferred compensation plan to take advantage of this election cancellation option.

2020 Required Minimum Distribution Waiver

The CARES Act provides for a waiver of RMDs from defined contribution plans and IRAs for 2020. Notice 2020-51 provides guidance for employers about the application of the waiver and offers some transition relief for RMD amounts paid in 2020.

Individuals who receive a distribution in 2020 that would be considered an RMD but for the CARES Act waiver provisions can roll over that distribution to an eligible retirement plan or an IRA. Rollovers are also available for some 2021 distributions that are covered by the CARES Act waiver provisions. Notice 2020-51 extends the normal 60-day rollover deadline for these distributions to no earlier than August 31, 2020. This rollover extension also applies to distributions made in 2020 to a participant who will attain age 70½ in 2020 that would have been an RMD but for the Setting Every Community Up for Retirement Enhancement (SECURE) Act provisions that increased the triggering age for RMDs to age 72 effective January 1, 2020.

Notice 2020-51 includes sample plan amendment language that plan sponsors may adopt to implement the CARES Act RMD waiver. Note that the deadline to adopt a written plan amendment is not until the last day of the 2022 plan year. Unlike other CARES Act amendments, the plan sponsor must sign and include an effective date for this CARES Act RMD waiver amendment. The notice also addresses questions regarding implementation issues such as spousal consent, tax withholding, and beneficiary distribution elections.

Ogletree Deakins will continue to monitor and report on developments with respect to the COVID-19 pandemic and will post updates in the firm’s Coronavirus (COVID-19) Resource Center as additional information becomes available. Important information for employers is also available via the firm’s webinar programs.