When the CARES Act was enacted, we wrote about its provisions that impact retirement plans and provide relief to plan sponsors and plan participants. Recently, pursuant to Section 2202 of the CARES Act, the Internal Revenue Service issued Notice 2020-50 on coronavirus-related distributions and plan loans from eligible retirement plans. Notice 2020-50 provides guidance to employers on several subjects associated with coronavirus-related distributions and plan loans, including the following:
Additional categories of “qualified individuals” for the purposes of coronavirus-related distributions and plan loans
“Qualified individuals” are individuals eligible under the CARES Act to elect coronavirus-related distributions and plan loans. Notice 2020-50 expands the definition of “qualified individuals” to those who experience adverse financial consequences as a result of:
- the individual having a reduction in pay (or self-employment income), a rescinded job offer, or a delayed job starting date due to COVID-19;
- the individual’s spouse or 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childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or a job starting date delayed due to COVID-19; or
- closing or reducing hours of a business owned or operated by the individual’s spouse.
A member of an individual’s household is someone who shares the individual’s principal residence.
A plan administrator’s reliance on certifications and a sample certification
A plan administrator may rely on an individual’s certification that he or she satisfies the conditions of a qualified individual, unless the administrator has actual knowledge to the contrary. The “actual knowledge” requirement does not require the administrator to inquire into whether the individual meets the qualified individual requirements. Instead, the “actual knowledge” requirement is limited to circumstances in which the administrator already possesses accurate information to determine the reliability of a certification.
Notice 2020-50 provides a sample notification that may be signed by an individual who claims to meet the requirements of a qualified individual.
Employer safe harbor for plan loans
The CARES Act provides for a one-year delay in the due date for a qualified individual’s repayment of a plan loan if the loan payment is due between March 27, 2020, and December 31, 2020. Notice 2020-50 provides a safe harbor for qualified employers who suspend a qualified individual’s loan due date. An employer will be treated as satisfying Code § 72 requirements if:
- The qualified individual’s obligation to repay an outstanding loan is suspended for any period not beginning earlier than March 27, 2020, and not later than December 31, 2020 (the “suspension period”).
- The loan repayment must resume after the end of the suspension period, and the term of the loan may be extended by up to one year from the date the loan was originally due.
- Interest accruing during the suspension period must be added to the remaining principal of the loan. This requirement is satisfied if the loan is reamortized and repaid in substantially level installments over the remaining loan period (for example, five years from the date of the loan, plus up to one year).
- If a qualified employer plan suspends loan repayments during the suspension period, the suspension will not cause the loan to be deemed distributed even if, due solely to the suspension, the term of the loan is extended beyond five years.
Qualified individuals may designate a distribution as a coronavirus-related distribution
Notice 2020-50 explains that a qualified individual is permitted to designate a distribution from an eligible retirement plan that does not exceed $100,000 and that is made on or after January 1, 2020, and before December 31, 2020 as a coronavirus-related distribution on his or her tax return without regard as to whether the plan treated the distribution as a coronavirus-related distribution. Similarly, a qualified individual may designate an eligible distribution as a coronavirus-related distribution even if the plan is not amended to provide for coronavirus-related distributions.
Employers’ decisions to amend plans to provide for coronavirus-related distributions and plan loans
An employer may choose whether to amend its plan to provide for coronavirus-related distributions and plan loans. Notice 2020-50 explains that, for instance, an employer may choose to provide for coronavirus-related distributions but also choose not to modify its plan’s loan provisions or loan repayment schedules. However, if a plan chooses to provide for coronavirus-related distributions, it must be consistent in its treatment of similar distributions.
An employer may choose whether to treat a plan distribution to a qualified individual as a coronavirus-related distribution. Nevertheless, as explained above, a qualified individual could designate a distribution that meets applicable requirements as a coronavirus-related distribution on his or her own tax return even if a plan is not amended to provide for coronavirus-related distributions.
Distribution limits on coronavirus-related distributions
The total amount of distributions to a qualified individual that are treated by an employer as coronavirus-related distributions under all of its retirement plans may not exceed $100,000. For purposes of this rule, “employer” means the employer maintaining the plan and those employers required to be aggregated with the employer. However, a plan will not fail to satisfy this requirement if a qualified individual’s total coronavirus-related distributions exceed $100,000 taking into account distributions from IRAs or other retirement plans maintained by unrelated employers.