Coronavirus-related distributions and loans from retirement plans
IRS releases further guidance in Notice 2020-50
TAX ALERT |
On June 19, 2020, the Internal Revenue Service released Notice 2020-50 which provides further guidance on coronavirus-related distributions and loans from qualified retirement plans. The Notice addresses the following:
Expanded definition of “Adverse Financial Consequences”. The definition of persons eligible for a “coronavirus-related distribution” because of “adverse financial conditions” is expanded to include:
- An individual, spouse or household member having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19;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 household member being quarantined, furloughed or laid off; or having work hours reduced due to COVID-19; or being unable to work due to lack of childcare due to COVID-19; and
- The closing or reduction in hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.
A household member for this purpose includes someone who shares the individual’s principal residence.
Expanded rules for the definition of “coronavirus-related distributions”. Under the CARES Act, a coronavirus-related distribution is limited to amounts withdrawn “solely to meet a need arising from COVID-19.” The Notice now permits an individual experiencing adverse financial consequences resulting from COVID-19 to withdraw funds regardless of the individual’s need for the funds, and the distribution amount is no longer limited to the extent of the individual’s adverse financial consequences.
The Notice contains a sample certification that an employer can use. The certification does not require the individual to specify the reason for the distribution; the individual just certifies that one of the acceptable reasons is applicable to their situation.
Re-contribution of hardship distributions. The Notice adds coronavirus-related hardship distributions to the list of withdrawals allowed to be included in income over three years. This is important, as normally a hardship distribution is not an eligible rollover distribution.
Guidance for Qualified Plan Sponsors.
Normal distribution rules still apply. The coronavirus-related distributions and loans permitted by the CARES Act are not mandatory, and employers may decide whether to implement them. The Notice makes clear, however, that plans are still required to comply with a plan’s normal distributions rules. For example, defined benefit plans are still required to get a spousal consent form for distribution options other than a joint and survivor annuity, even if the distribution is otherwise coronavirus-related.
Relief from the rollover rules. Under the Notice, if a plan treats the distribution as a coronavirus-related distribution, the plan does not have to issue the normal rollover notice and the 20% withholding requirement does not apply (though voluntary withholding is still permitted under existing rules).
Individual income tax reporting. The Notice provides that, to the extent that coronavirus-related distribution and loan provisions are not adopted by the plan sponsor, the participant is still entitled to treat the distribution as a tax-favored coronavirus-related distribution on the participant’s federal income tax return.
Reliance on certifications. As noted above, the Notice provides an example of an acceptable certification for an individual seeking a coronavirus-related distribution. A plan may accept a participant’s certification that a distribution is a coronavirus-related, absent actual knowledge to the contrary. The Notice clarifies that “actual knowledge” means situations where the administrator already possesses sufficiently accurate information, but does not include a duty to inquire. An individual claiming a coronavirus-related distribution for tax return purposes may not rely on a certification, but must actually satisfy the eligibility requirements.
Plan amendment deadline. While a plan may apply the CARES Act distribution provisions operationally, the plan document need not be amended until Jan. 1, 2022. Special rules apply for governmental plans.
Guidance on reporting recontributed Coronavirus-related distributions. The Notice provides the following reporting rules:
- A plan must report repaid amounts on Form 1099-R (Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, etc.), even where the amounts are repaid to the same eligible retirement plan in the same year. Notice section 4(A) discusses the distribution codes for Form 1099-R purposes.
- The participant may recontribute the distribution to any plan that accepts rollover distributions in the normal course and reasonably concludes that the amount is eligible for direct rollover treatment. The receiving plan may rely on an individual’s certificate, absent actual knowledge to the contrary.
- Individuals may report coronavirus-related distributions on their federal income tax returns for 2020 and on Form 8915-E (expected to be available by year-end), or if no federal income tax form is required, on Form 8915-E.
- A recontribution of a coronavirus-related distribution during the three-year period does not count for purposes of the one-rollover-per-year limitation.
- A recontribution at any time during the three-year period reduces the amount of the coronavirus-related distribution included in gross income for the year of the distribution, as reported on Form 8015-E.
Plan loans. The Notice provides a safe harbor method for plans allowing the suspension of loan repayments for a year under the CARES Act. The safe harbor addresses the adjustment of subsequent loan repayments, interest, deemed distributions and reamortization. A plan administrator may rely on an individual’s certification regarding plan loans under the CARES Act, absent actual knowledge to the contrary.
Non-qualified deferred compensation. Under the Notice, a non-qualified deferred compensation plan (NQDC) participant who receives a coronavirus-related hardship distribution from an eligible retirement plan may claim an Unforeseeable Emergency for purposes of cancelling an election under section 409A. This means that the NQDC may provide for a cancellation of the individual’s deferral election due to a coronavirus-related distribution.