On June 19, 2020, the IRS issued Notice 2020-50 (the “Notice”), which provides additional guidance regarding coronavirus distributions and loans from qualified retirement plans under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. (Click here to read more about the new coronavirus distribution rights and loan rules under the CARES Act.) The Notice expands the group eligible for the new distribution and preferential loan provisions, clarifies the impact of the retroactive effective date for coronavirus distributions, discusses reporting of coronavirus distributions and the impact of such distributions on nonqualified deferred compensation plans, and provides a safe harbor for implementing loan repayment delays, each of which is discussed below.
As a reminder, the new coronavirus distribution rights and preferential loan provisions in the CARES Act only apply to “Qualified Individuals.” As expanded under the Notice, “Qualified Individuals” now include an individual:
The plan administrator is entitled to rely on a participant’s certification that the participant is a Qualified Individual, and page nine of the Notice contains a sample certification that plans can use for that purpose.
The CARES Act provides that the special coronavirus distribution is available from January 1, 2020, through December 31, 2020. The Notice clarifies that the retroactive effective date is meant to allow Qualified Individuals to designate any distribution that they took during 2020 (such as a required minimum distribution or regularly scheduled periodic distribution) as a coronavirus distribution, which allows them to take advantage of the special income tax rules and repayment rules with respect to such distributions.
Because coronavirus distributions can be repaid and/or can be reported as income for tax purposes over three years, it was unclear how qualified plans should report those distributions. The Notice provides that the plan must report the full amount of a coronavirus distribution made to a plan participant on a 1099-R for 2020, even if the participant repays the full amount of the distribution by the end of 2020 or is going to spread the income taxes related to the distribution over three years. The participant will deal with the taxable income allocation over the three-year period and the impact of any repayments via a Form 8915-E, which is a form that employees will be responsible for filing with their individual tax returns. In other words, employers and qualified plans will not be responsible for tracking the three-year tax allocation or repayments—that will be the participant’s responsibility. Note that the Notice also includes several pages describing the reporting obligations of Qualified Individuals under different scenarios, including how the reporting will be different if they opt out of the three-year income tax allocation or if they take advantage of the repayment option.
Under Section 409A of the Internal Revenue Code, an employer may cancel an employee’s deferral election under its nonqualified deferred compensation plan if the employee takes a hardship distribution from its qualified retirement plan. The Notice provides that the new coronavirus distribution is treated as a hardship withdrawal for purposes of this rule, such that the employer may cancel deferral elections under their nonqualified plans for employees that take a coronavirus distribution from their 401(k) plan account. Employers should check their nonqualified plan document to determine what it says about canceling deferral elections when an employee takes a hardship distribution from the qualified plan and then decide (and document) how coronavirus distributions will be treated for purposes of such nonqualified plan.
The CARES Act provides that a plan may permit a Qualified Individual who has an outstanding loan (whether a loan that was already in effect on the date of the enactment of the CARES Act or a new loan taken after the date of enactment) to delay payments due on such loan between the date of enactment and December 31, for one year. The Notice provides a safe harbor method of implementing the one-year delay for employers who want to offer this benefit to their employees. The method of implementing the one-year suspension meets the safe harbor if:
The Notice includes a numerical example on page 18, which employers may want to review for additional clarity in how the safe harbor method works.
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