On Friday, June 19, 2020, the Internal Revenue Service released Notice 2020-50 clarifying and expanding provisions of the CARES Act that are designed to help retirement plan participants affected by COVID-19.
The CARES Act provides enhanced access to plan distributions and plan loans for participants affected by the pandemic. The Notice expands the categories of individuals eligible for those COVID-19 distributions and loans (referred to as “qualified individuals”) and provides guidance and examples on how qualified individuals are to report those distributions and loans on their federal income tax filings.
Distributions at the Individual Level
The CARES Act allows qualified individuals to treat as “coronavirus-related distributions” up to $100,000 in distributions made from their eligible retirement plans (including IRAs) between January 1 and December 30, 2020. A coronavirus-related distribution is not subject to the 10% additional tax that generally applies to distributions made before an individual reaches age 59 ½. In addition, a coronavirus-related distribution can be included in income for tax purposes in equal installments over a three-year period. Finally, an individual has three years to repay a coronavirus-related distribution to a plan or IRA and eliminate the income tax consequences of the distribution.
Distributions at the Plan Level
The CARES Act provides that plans may implement certain rules to assist qualified individuals, including the suspension of loan repayments that are due from March 27 through December 31, 2020, and increasing the dollar limit on loans made between March 27 and September 22, 2020, from $50,000 to $100,000.
Notice 2020-50 expands the definition of who is a qualified individual to take into account additional factors such as reductions in pay, rescissions of job offers, and delayed start dates.
As expanded under Notice 2020-50, a qualified individual is anyone who
- Is diagnosed, or whose spouse or dependent is diagnosed, with COVID-19 by a test approved by the Centers for Disease Control and Prevention (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:
- 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
- Closing or reducing hours of a business that they own or operate due to COVID-19
- Having pay or self-employment income reduced due to COVID-19
- Having a job offer rescinded or start date for a job delayed due to COVID-19
Employers and Plan Administrators
Under Notice 2020-50, employers can choose whether to implement these coronavirus-related distribution and loan rules, and qualified individuals can claim the tax benefits of coronavirus-related distribution rules even if plan provisions are not changed. Further, plan administrators can rely on an individual’s certification that the individual is a qualified individual. The Notice includes a sample certification form. Notice 2020-50 provides employers with a safe harbor procedure for implementing the suspension of loan repayments otherwise due through the end of 2020.
Notice 2020-50 is extensive and contains numerous specific rules and guidance for employers, plan sponsors, and plan participants. Employers, plan sponsors, and individuals may contact the Employee Benefits attorneys at Woods Rogers for more details about how the CARES Act rules for coronavirus-related distributions and loans from plans apply to them.