The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted March 27, 2020. On July 6, 2020, the IRS will publish Notice 2020-50 in Internal Revenue Bulletin 2020-28. The guidance in the notice is intended to assist employers and plan administrators in applying Section 2202 of the CARES Act, relating to coronavirus-related distributions and special participant loan relief. Below is a summary of the information applicable to employer retirement plans contained in the notice.
In addition, on July 13, 2020, the IRS will publish Notice 2020-51 in Internal Revenue Bulletin 2020-29. This notice provides guidance on Section 2203 of the CARES Act relating to the waiver of 2020 required minimum distributions from certain retirement plans.
Note that this alert is the fourth in a series of McGuireWoods client alerts relating to COVID-19 and employee benefits. Previous installments include the following:
Definition of a Coronavirus-Related Distribution
A coronavirus-related distribution may be any distribution from an eligible retirement plan made on or after Jan. 1, 2020, and before Dec. 31, 2020, to a qualified individual (which generally includes any individual who was diagnosed with coronavirus, whose spouse or dependent was diagnosed with coronavirus, or who experienced certain adverse financial consequences as a result of the coronavirus pandemic). The aggregate amount of distributions that can be considered coronavirus-related distributions is $100,000. Up to this limit, any distribution to a qualified individual within this timeframe, subject to limitations, may be treated by the qualified individual as a coronavirus-related distribution for tax purposes. Notably, an employer retirement plan is permitted, but not required, to treat a distribution meeting the conditions above as a coronavirus-related distribution.
The administrator of an eligible retirement plan may rely on an individual’s certification that he or she 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. There is no obligation to inquire into the individual’s certification of status. Furthermore, coronavirus-related distributions are permitted without regard to the qualified individual’s need for funds, and the amount of the distribution need not correspond to the financial hardship of the qualified individual. The notice provides an example of a certification that would satisfy these requirements.
Timing and Conditions of Distributions
If an employer retirement plan designates a distribution as a coronavirus-related distribution, then the distribution will not cause the plan to be disqualified even if it is made before a participant’s separation from service or before a participant has attained age 59½. However, a qualified plan that is a pension plan is not permitted to make a distribution before an otherwise permitted distributable event merely because the distribution, if made, would qualify as a coronavirus-related distribution. Further, a pension plan cannot make a distribution under a distribution form that is not a qualified joint and survivor annuity without spousal consent merely because the distribution, if made, could be treated as a coronavirus-related distribution.
Certain Restrictions and Requirements Are Not Applicable
If an employer retirement plan treats a distribution as coronavirus-related, an eligible employer plan is not required to offer the qualified individual a direct rollover with respect to the distribution. In addition, the plan administrator is not required to provide a § 402(f) notice. Finally, the plan administrator is also not required to withhold an amount equal to 20 percent of the distribution, which is generally required. Voluntary withholding requirements, however, still apply to coronavirus-related distributions.
Employer Treatment of Distributions for Tax Purposes
An employer (or plan administrator) is permitted to choose whether, and to what extent, to treat distributions under its plans as coronavirus-related distributions. For example, an employer may choose to provide for coronavirus-related distributions without changing its plan loan provisions or loan repayment schedules. The employer may even develop reasonable procedures for identifying which distributions are treated as coronavirus-related distributions under its retirement plans. Regardless of whether such procedures are adopted, however, the plan must be consistent in its treatment of similar distributions.
An eligible retirement plan must report the payment of a coronavirus-related distribution to a qualified individual on Form 1099-R, regardless of whether the individual recontributes the distributed amount to the plan within the same year.
In general, a qualified individual who receives a coronavirus-related distribution that is eligible for tax-free rollover treatment may recontribute the distributed amount within three years of receiving the distribution. The recontribution may be to the plan from which the distribution was taken, to an IRA or to another eligible retirement plan that is permitted to accept eligible rollover contributions. The recontribution will be treated as a tax-free rollover contribution for tax purposes.
Eligible retirement plans are generally not required to accept rollover contributions. However, the IRS has indicated that if the plan accepts other types of rollover contributions, then it would be expected to accept recontributions of eligible coronavirus-related distributions as well. Whether a plan could be amended to accept traditional rollover contributions but not recontributions of coronavirus-related distributions is unclear. If it accepts recontributions, the employer retirement plan must reasonably conclude that the recontribution satisfies the above requirements and may rely on a qualified individual’s certification to this effect, unless it has actual knowledge to the contrary.
An employer is permitted to choose whether, and to what extent, to apply the following coronavirus-related plan loan rules. Furthermore, regarding whether an employee is a qualified individual, the employer may rely on the employee’s certifications.
New Plan Loans
Generally, Internal Revenue Code Section 72(p) allows a plan loan from a qualified employer plan of up to $50,000 in the aggregate. For plan loans to qualified individuals on or after March 27, 2020, and before Sept. 23, 2020, this limit was increased to $100,000. Additionally, during this time frame, a qualified individual may take a loan of up to 100 percent of the vested accrued benefit rather than being limited to 50 percent of that amount.
Repayment of Plan Loans
Under Section 2202 of the CARES Act, if a payment is due for an outstanding loan from a qualified employer plan between March 27, 2020, and Dec. 31, 2020, then the due date for that payment may be postponed for one year. Subsequent payments will need to be adjusted accordingly to reflect the delay. Additionally, this period of delay must be disregarded in calculating the five-year amortization period for loans.
The notice creates a safe harbor for satisfying these requirements with respect to plan loans. Under this safe harbor, a qualified employer plan will satisfy these requirements 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 Dec. 31, 2020 (suspension period). The loan repayments 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 repayment was originally due. The suspension will not cause the loan to be deemed distributed even if the term of the loan is extended beyond five years. Interest accruing during the suspension period must be added to the remaining principal of the loan. A plan satisfies these rules if the loan is re-amortized and repaid in substantially level installments over the remaining period of the loan.
Nonqualified Deferred Compensation Plans
Generally, nonqualified deferred compensation plans subject to Internal Revenue Code Section 409A may allow employees to cancel their deferral elections to such plans due to an unforeseeable emergency or because the employee received a hardship distribution from a qualified retirement plan. Now, for the sake of nonqualified 409A plans, a hardship distribution includes a coronavirus-related distribution from a qualified retirement plan. Thus, a 409A plan may allow an employee to cancel deferral elections if the employee takes a coronavirus-related distribution from a qualified plan. The deferral election must be canceled altogether, rather than postponed to a later date.
Required Minimum Distributions
CARES Act Section 2203 provides for the temporary waiver of required minimum distributions (RMD) in 2020 for qualified employer retirement plans. Notice 2020-51 explains the application of this section for employers and plan administrators, as well as providing transition relief from the eligible rollover distribution rules for RMDs paid in 2020 without regard to the change in beginning date required by Section 114 of the Setting Every Community Up for Retirement Enhancement Act (SECURE Act).
The SECURE Act changed the required beginning date for participants’ RMDs from 70½ to 72. The notice provides that if a participant turns 70½ in 2020 and receives a distribution in 2020 that would have been an RMD but for the recent change in law, then that distribution is not required to be treated as an eligible rollover distribution for purposes of Internal Revenue Code Section 401(a)(31), 402(f) and 3405(c).
Taxpayers who receive certain distributions may now roll them into an eligible retirement plan. Generally, the following distributions (from a retirement plan other than a defined benefit plan) may be rolled over:
- Distributions paid in 2020 (or paid in 2021 for the 2020 calendar year in the case of an employee who has a required beginning date of April 1, 2021), which would have been RMDs but for the CARES Act (including substantially equal periodic payments that include payments that would have been 2020 RMDs)
- Distributions paid in 2021 for plan participants with a required beginning date of April 1, 2020, which would have been RMDs but for the CARES Act
Further, the IRS has extended the 60-day period during which plan participants may roll over the distributions described above. Now, the rollover deadline is Aug. 31, 2020, at the earliest.
Sample Plan Amendment
In Notice 2020-51, the IRS provides a sample plan amendment for defined contribution plans, generally following the design of pre-approved plans with a basic plan document and an adoption agreement, which plan sponsors may adopt to implement the temporary waiver of required minimum distributions. Employers and plan administrators may select the sample language relevant to their own plans and adapt the language to fit their plan terms, formats and administrative procedures. The sample plan amendment provides that participants may choose whether to receive distributions that include 2020 RMDs, and provides different defaults for this choice, as well as different options for the availability of direct rollover choices for 2020.
The notice also provides detailed answers to many technical questions arising under the RMD rules with respect to Section 2203 of the CARES Act, which employer retirement plans and plan administrators implanting these changes may wish to consider.
Required Plan Amendments
An employer retirement plan will not be treated as failing to operate in accordance with its terms merely because the plan implements the provisions of Sections 2202 and 2203 of the CARES Act before drafting a written amendment. Rather, the employer plan is required simply to adopt a timely written amendment, signed and dated by the employer. Most employer retirement plans are required to be amended by the last day of the first plan year beginning on or after Jan. 1, 2022.
Please contact the authors or any member of the McGuireWoods employee benefits group to discuss any questions about this IRS guidance.
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