On June 19, 2020, the Internal Revenue Services (“IRS”) provided additional guidance in Notice 2020-50 (the “Notice”) regarding coronavirus-related distributions (“CRDs”) and participant loan relief under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The Notice follows previous guidance issued by the IRS regarding CRDs and participant loans under the CARES Act.
Clarifications Regarding CRDs
Definition of Qualified Individual
The CARES Act defines a “qualified individual” as a plan participant who has been diagnosed with COVID-19, has a spouse or dependent who has been diagnosed with COVID-19, or has experienced adverse financial consequences due to being quarantined, furloughed or laid off, or having work hours reduced, being unable to work due to a lack of childcare, or closing or a reduction of hours of a business owned by the participant due to COVID-19.
The Notice expands the definition of a “qualified individual” to include a plan participant who experiences adverse financial consequences as a result of the following:
- Having a reduction in pay, a job offer rescinded, or a start date for a job delayed due to COVID-19;
- As a result of COVID-19, a spouse or other member of the participant’s household (defined as anyone sharing the individual’s principal residence) being quarantined, furloughed or laid off, or having work hours reduced, being unable to work due to a lack of childcare, having a reduction in pay, or having a job offer rescinded or start date for a job delayed; or
- Closing or a reduction of hours of a business owned by the individual’s spouse or member of the individual’s household due to COVID-19.
Amount of CRD Need Not Be Limited to Specific Need
The Notice clarifies that the amount of a CRD is not limited to amounts withdrawn solely to meet a financial need arising from COVID-19. Thus, a qualified individual may receive a CRD without regard to the individual’s need for the funds and the amount of the distribution may exceed the individual’s COVID-19-related financial need.
Plan Administration and CRDs
The CARES Act allows a plan administrator to rely on a participant’s self-certification regarding eligibility for a CRD, provided the administrator does not have actual knowledge that the individual does not qualify. The Notice clarifies that administrators do not have an obligation to investigate whether the participant’s certification is accurate. Instead, the “actual knowledge” requirement is limited to situations where the administrator already possesses sufficient information to determine the accuracy of the participant’s certification.
The Notice provides that a plan is not required to offer a qualified individual a direct rollover with respect to a CRD and the plan administrator is not required to provide a notice of general rollover requirements to the participant or withhold 20% of the distribution (as is usually required for distributions that are eligible for rollover).
Plan Acceptance of CRD Recontribution
The CARES Act permits individuals to repay all or part of the amount of a CRD if the repayment occurs within three years after the date the distribution is received. If a plan does not otherwise accept rollover contributions, it is not required to change its rules to accept CRD repayments. The Notice clarifies that a CRD paid to a beneficiary of a participant (other than the participant’s surviving spouse) is not eligible to be recontributed to the plan.
The Notice also provides that if a plan accepts an invalid recontribution of a CRD, the repayment will be treated as valid (and will not disqualify the plan) if the plan administrator: (1) reasonably concludes when accepting the recontribution that it is eligible for direct rollover treatment and (2) distributes any amount of the recontribution, plus attributable earnings, to the participant within a reasonable time once the plan determines that the recontribution was invalid. A plan administrator is permitted to rely on a participant’s certification when determining eligibility for recontribution.
Tax Reporting of CRDs and Recontributions
Under the Notice, a plan is required to report the payment of a CRD in the year of distribution on Form 1099-R, regardless of whether the individual repays the distribution. If an individual chooses to designate an eligible distribution as a CRD, the individual must report the distribution on Form 8915-E (expected to be released by the end of this year) when filing the individual’s federal income tax return.
The Notice also provides instructions for individuals who make a recontribution of a CRD to follow when adjusting their federal tax returns to reflect the recontribution. This adjustment may include amending a previously filed tax return or Form 8915-E.
Participant Loan Relief
The CARES Act provides that, for plan loans to participants outstanding as of March 27, 2020, plans are permitted (but not required) to suspend any repayment on the loan that is due from March 27, 2020 to December 31, 2020 for up to one year, provided the participant meets the definition of a qualified individual described above. The term of the loan may be extended by the duration of the repayment suspension period.
The Notice provides a safe harbor for plans to satisfy the repayment suspension provisions of the CARES Act. Under this safe harbor, the loan repayments must resume after the end of the suspension period and interest accruing during the suspension period must be added to the remaining principal of the loan. In addition, the loan must be re-amortized and repaid in substantially level installments over the remaining period of the loan. The Notice notes that plans are not required to use the safe harbor and that there may be other reasonable methods of implementing the loan suspension rules.
Please contact Slevin & Hart for more information about how the CARES Act and recent guidance may affect your retirement plan.
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