IRS Notice 2020-50 provides guidance on coronavirus-related distributions and CARES Act loans from retirement plans.
On June 19, 2020, the IRS issued Notice 2020-50, which provides guidance on coronavirus-related distributions and CARES Act loans from retirement plans.
Retirement Plan-Related Provisions Under the CARES Act
The retirement plan-related provisions of the CARES Act:
Allow penalty-free coronavirus-related distributions of up to $100,000 from retirement plans.
Increase the amount of a permissible retirement plan loan for individuals affected by the coronavirus.
Waive defined contribution required minimum distribution requirements for 2020.
Provide single-employer defined benefit plan funding relief.
Guidance Under Notice 2020-50 for Coronavirus-Related Distributions
Section 2202(a) of the CARES Act allows coronavirus-related distributions of up to $100,000 from qualified retirement plans. The distributions are exempt from the 10% early-withdrawal tax under Code Section 72(t) (26 U.S.C. § 72(t)).
The CARES Act provides that a coronavirus-related distribution is a distribution:
Made on or after January 1, 2020, and before December 31, 2020.
From an eligible retirement plan as defined in Code Section 402(c)(8)(B) (26 U.S.C. § 402(c)(8)(B)), which is a:
tax-qualified retirement plan under Code Section 401(a) (26 U.S.C. § 401(a));
whose spouse or dependent is diagnosed with the virus or disease; or
who experiences "adverse financial consequences" due to the virus or disease as a result of being quarantined; being furloughed, laid off, or having work hours reduced; being unable to work due to the lack of childcare; or the closing or reduction in hours of a business that the individual owns or operates.
Coronavirus-Related Distributions Expanded Under Notice 2020-50
Notice 2020-50 expands who may take a coronavirus-related distribution to include an individual who experiences adverse financial consequences as a result of:
The individual having a reduction in pay or self-employment income due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19.
The individual's spouse or a 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childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19.
Closing or reducing hours of a business owned or operated by the individual's spouse or a member of the individual's household due to COVID-19.
Under this expanded definition, a member of the individual's household is someone who shares the individual's principal residence.
Notice 2020-50 refers to a person who may take a coronavirus-related distribution as a qualified individual.
Guidance Under Notice 2020-50 for Tax Treatment of Coronavirus-Related Distributions
Under the CARES Act, participants can repay the coronavirus-related distribution to an eligible retirement plan during the three-year period after the distribution is received. Income attributable to the distribution will be taxed ratably over a three-year period, unless the employee elects otherwise.
Coronavirus-related distributions cannot be treated as eligible rollover distributions.
Distribution Options
Notice 2020-50 explains that coronavirus-related distributions generally are treated as satisfying plan distribution restrictions.
Under Notice 2020-50, an employer may expand the distribution options under its plan to allow an amount attributable to a plan contribution (such as an elective, qualified nonelective, qualified matching, or safe harbor contribution) under a qualified cash or deferred arrangement to be distributed as a coronavirus-related distribution even though it is distributed before an otherwise permitted distributable event.
Notice 2020-50 clarifies that the CARES Act does not change the rules for when plan distributions are permitted to be made from employer retirement plans; a qualified retirement plan is not permitted to make a distribution before an otherwise permitted distributable event merely because the distribution would qualify as a coronavirus-related distribution.
Under Notice 2020-50, coronavirus-related distributions from a retirement plan are not subject to the rules for eligible rollover distributions under Code Sections 401(a)(31), 402(f), and 3405 (26 U.S.C. §§ 401(a)(31), 402(f), and 3405), which means that the plan (or plan administrator) is not required to:
Offer the qualified individual a direct rollover with respect to the distribution.
Withhold an amount equal to 20% of the distribution, as is usually required under Code Section 3405(c)(1).
However, a coronavirus-related distribution is subject to the voluntary withholding requirements of Code Section 3405(b) and Treasury Regulation Section 35.3405-1T (26 C.F.R. § 35.3405-1T).
Treat plan distributions as coronavirus-related distributions.
Apply the coronavirus-related plan loan rules.
This means that an employer may choose to provide for coronavirus-related distributions but choose not to change its plan loan provisions or loan repayment schedules. An employer (or plan administrator) is permitted to develop any reasonable procedures for identifying which retirement plan distributions are treated as coronavirus-related distributions under its retirement plans, but if any distribution of an amount subject to Code Sections 401(k)(2)(B)(i), 403(b)(7)(A)(i), 403(b)(11), or 457(d)(1)(A) is treated as a coronavirus-related distribution, the plan must be consistent in its treatment of similar distributions (26 U.S.C. §§ 401(k)(2)(B)(i), 403(b)(7)(A)(i), 403(b)(11), or 457(d)(1)(A)).
The Notice provides that even if a retirement plan distribution is not treated as coronavirus-related, a qualified individual may treat a distribution that meets the requirements of the Notice as a coronavirus-related distribution on the individual's federal income tax return.
Distribution Limits
The Notice clarifies that the total amount of coronavirus-related distributions from all of an employer's retirement plans to a qualified individual is not permitted to exceed $100,000. This refers to the employer maintaining the plan and the members of its controlled group. However, a plan will not violate this rule if a qualified individual's total coronavirus-related distributions exceed $100,000 and those distributions come from IRAs or other eligible retirement plans maintained by unrelated employers.
Certifications
A retirement plan administrator may rely on an individual's certification that the individual satisfies the conditions to be a qualified individual in determining whether a distribution is a coronavirus-related distribution, unless the administrator has actual knowledge to the contrary.
The administrator does not have an obligation to inquire into whether an individual has satisfied the conditions under Section 2202 of the CARES Act to be a qualified individual; the actual knowledge requirement is limited to situations in which the administrator already possesses sufficiently accurate information to determine the truth of a certification. However, an individual may treat the distribution as a coronavirus-related distribution on his or her federal income tax return only if the individual actually is a qualified individual under the CARES Act.
The Notice provides an example of an acceptable certification.
Deadlines for Plan Amendments
To implement the provisions of Section 2202 of the CARES Act, an employer must amend its plan by:
The last day of the first plan year beginning on or after January 1, 2022 (for employer-sponsored plans other than governmental plans under Code Section 414(d) (26 U.S.C. § 414(d))).
The last day of the first plan year beginning on or after January 1, 2024 (for governmental plans under Code Section 414(d)).
These dates may be extended in future guidance from the IRS.
Guidance Under Notice 2020-50 for Coronavirus-Related Distributions and Recontributions
Notice 2020-50 provides guidance for eligible retirement plans (employer-sponsored retirement plans and IRAs) that:
Make coronavirus-related distributions.
Accept recontributions of coronavirus-related distributions.
Tax Reporting
Retirement plans that offer coronavirus-related distributions must report the payment of a coronavirus-related distribution to a qualified individual on IRS Form 1099-R. This reporting is required even if the qualified individual recontributes the coronavirus-related distribution to the same eligible retirement plan in the same year.
The payor may use distribution code 2 (early distribution, exception applies) in box 7 of Form 1099-R or distribution code 1 (early distribution, no known exception) in box 7 of Form 1099-R.
Accepting Recontributions
A qualified individual who receives a coronavirus-related distribution that is eligible for tax-free rollover treatment may recontribute, at any time in a three-year period, any portion of the distribution to an eligible retirement plan that is permitted to accept eligible rollover contributions.
An employer retirement plan accepting recontributions of coronavirus-related distributions will obtain the relief provided in Q&A-14 of Treasury Regulation Section 1.401(a)(31)-1 (26 C.F.R. § 1.401(a)(31)-1) if a plan administrator accepting the recontribution reasonably concludes that the recontribution is eligible for direct rollover treatment under Section 2202(a)(3) of the CARES Act and that the recontribution is made according to the rules under Section 4.C. of Notice 2020-50. A plan administrator may rely on an individual's certification that the individual satisfies the conditions to be a qualified individual.
If a plan does not accept any rollover contributions, the plan is not required to change its terms or procedures to accept recontributions of coronavirus-related distributions.
Guidance Under Notice 2020-50 for Individuals Receiving Coronavirus-Related Distributions
A qualified individual receiving a coronavirus-related distribution is entitled to the favorable tax treatment for the distribution by reporting the distribution on his or her federal income tax return for 2020 and on IRS Form 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments (or if there is no federal income tax return for 2020, by filing just Form 8915-E). Form 8915-E is expected to be available before the end of 2020. The favorable tax treatment includes:
The 10% additional tax under Code Section 72(t) (26 U.S.C. § 72(t)) (including the 25% additional tax under Code Section 72(t)(6) for certain distributions from SIMPLE IRAs) does not apply to any coronavirus-related distribution.
A coronavirus-related distribution is permitted to be included in income ratably over three years.
A qualified individual may recontribute any portion of a coronavirus-related distribution that is eligible for tax-free rollover treatment to an eligible retirement plan within the three-year period beginning on the day after the date on which the distribution was received. The recontribution will be treated as if it were paid in a trustee-to-trustee transfer to an eligible retirement plan.
Qualified individuals will use Form 8915-E to determine the amount of the coronavirus-related distribution includible in income for the taxable year.
A qualified individual may include the taxable portion of a coronavirus-related distribution in income:
Ratably over a three-year period that begins in the year of the distribution.
In the year of the distribution.
The method chosen must apply to all coronavirus-related distributions received by the individual.
Qualified individuals who receive a coronavirus-related distribution that is eligible for tax-free rollover treatment may during the three-year period after the distribution recontribute any portion of the distribution, but not an amount in excess of the amount of the distribution, to an eligible retirement plan. The recontribution will not be treated as a rollover contribution for purposes of the one-rollover-per-year limitation under Code Section 408(d)(3)(B) (26 U.S.C. § 408(d)(3)(B)).
Notice 2020-50 also discusses and provides examples explaining:
The tax treatment of recontributions of a coronavirus-related distribution made to a taxpayer who uses the one-year income inclusion method or the three-year ratable income inclusion method.
That recontributions of a coronavirus-related distribution may be carried back or forward when using the three-year ratable income inclusion method.
If a qualified individual dies before the full taxable amount of the coronavirus-related distribution has been included in gross income, then the remainder must be included in gross income for the taxable year that includes the individual's death.
Coronavirus-related distributions will not be treated as a change in substantially equal periodic payments under Code Section 72(t)(4).
Guidance Under Notice 2020-50 for CARES Act Plan Loans
Increase in Plan Loan Amounts and Repayment Period
Section 2202(b)(1) of the CARES Act increased the maximum retirement plan loan amount for loans made to affected participants during the 180-day period beginning on March 27, 2020 (the Act's enactment date). Participants are eligible for the increased loan if they meet the same requirements as for the coronavirus-related distribution.
Eligible participants can take a loan that is the lesser of:
$100,000 (an increase from $50,000).
Greater of 100% (an increase from 50%) of the present value of the participant's benefit or $10,000.
Notice 2020-50 provides a safe harbor providing that suspensions of payments and extensions of loan terms will be treated as satisfying Section 2202(b)(2) of the CARES Act. Section 2202(b)(2) delays the repayment due date for certain plan loans for up to one year.
Notice 2020-50 provides a safe harbor for satisfying Section 2202(b)(2) of the CARES Act. Under the safe harbor, a qualified employer-sponsored retirement plan will be treated as satisfying the requirements of Code Section 72(p) (26 U.S.C. § 72(p)) 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.
Guidance Under Notice 2020-50 for Nonqualified Deferred Compensation Plans
Under Section 409A, a nonqualified deferred compensation plan may provide for the cancellation of a service provider’s deferral election, or a cancellation may be made, if a service provider experiences an unforeseeable emergency (as defined under Section 409A) or takes a hardship distribution as defined under Treasury Regulation Section 1.401(k)-1(d)(3) (26 C.F.R. § 1.401(k)-1(d)(3)).
Notice 2020-50 provides that if a service provider receives a coronavirus-related distribution, that distribution will be considered a hardship distribution under Treasury Regulation Section 1.401(k)-1(d)(3) for purposes of Section 409A. This means that a nonqualified deferred compensation plan may provide for the cancellation of a service provider's deferral election, or a cancellation may be made, due to a coronavirus-related distribution. The deferral election must be cancelled, not merely postponed or otherwise delayed. For more information on Section 409A, see Practice Note, Section 409A: Deferred Compensation Tax Rules: Overview.
Practical Implications
Retirement plan sponsors and administrators should familiarize themselves with the guidance provided in IRS Notice 2020-50. At a time when retirement plan sponsors are considering whether to amend their plans to allow coronavirus-related distributions or increased plan loan amounts under the CARES Act, and plan service providers are facing questions regarding administrative aspects of the CARES Act, the guidance provided in IRS Notice 2020-50 will help plans and their participants address the tax consequences of their actions.
For a continuously updated collection of resources addressing COVID-19, see Practical Law's Global Coronavirus Toolkit.