More Details on CARES Act Eligibility and Plan Loan Guidance
The retirement industry eagerly received the IRS guidance on applying provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act with the issuance of Notice 2020-50 on June 19. It has provided important details on compliance with this legislation—which offers financial and tax relief to millions of Americans affected by the coronavirus (COVID-19) pandemic.
The CARES Act was signed into law on March, 27, 2020, as the largest emergency relief package in U.S. history. It offers a variety of potential benefits to those who participate in tax-favored retirement savings arrangements. The legislation not only grants special access to the tax-favored accounts of many who may need it, but also provides a pathway to later repayment. For amounts up to $100,000, there is an exemption from the 10 percent penalty tax for early distributions from a retirement plan, three-year ratable taxation of amounts distributed, and a three-year repayment option for those who qualify.
Although there has been comparable legislation for past disaster events—notably, Hurricane Katrina in 2005—still there has been some uncertainty as to how closely CARES Act procedures might ultimately mirror it. Notice 2020-50 now provides greater clarity and is to be followed in applying CARES Act provisions.
Following are some of the more significant highlights of Notice 2020-50.
Qualified Individual Definition Expanded
Notice 2020-50 broadened the definition of who is eligible for a coronavirus-related distribution (CRD)—and therefore eligible for CARES Act tax benefits.
Initial guidance defined a “qualified individual” as
- an individual (or the spouse or dependent of the individual) who is diagnosed with the COVID-19 disease or the SARS-CoV-2 virus in an approved test; or
- an individual who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reduced hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Treasury Secretary.
Notice 2020-50 adds new circumstances to the definition of “qualified individual.”
- An individual who has experienced a reduction in pay (or self-employment income) due to COVID-19, or has had a job offer rescinded or a start date for a job delayed due to COVID-19.
- An individual whose spouse or a member of the person’s household has
- been quarantined, furloughed or laid off, or had work hours reduced due to COVID-19;
- been unable to work because of a lack of childcare due to COVID-19,
- had a reduction in pay (or self-employment income) due to COVID-19; or
- had a job offer rescinded or a start date for a job delayed due to COVID-19.
- An individual whose spouse or a member of the person’s household has experienced the closing or a reduction of hours of their business due to COVID-19.
For purposes of applying these additional factors, a member of the individual’s household is someone who shares the individual’s principal residence.
A CRD was defined in the statute as an amount distributed from a retirement account on or after January 1, 2020, and before December 31, 2020. Notice 2020-50 affirmed that a distribution taken on December 31, 2020, would not be a CRD.
Who Can and Cannot Recontribute CRDs
A CRD can be taxed ratably over three years, and generally can be recontributed to an eligible retirement plan within three years. However, Notice 2020-50 makes clear that while beneficiaries of retirement plans and IRAs may be taxed in this manner, only spouse beneficiaries may make recontributions.
Employer May Choose Whether to Allow CRDs, Other CARES Act Options
Employers can choose to allow participants in their retirement plans (other than pension plans) to take CRDs even without otherwise having a distributable event, if they are qualified individuals, up to $100,000 of their vested balance.
Notice 2020-50 makes clear that employers are not required to offer CRDs to participants. If they do, they are not required to implement all elements of CARES Act relief, such as enhanced retirement plan loan amount or available loan suspension options.
Reliance on Employee Certification
Employers that offer retirement plan CRDs are allowed to rely on an employee-participant’s certification that he is a qualified individual, unless the employer has actual knowledge to the contrary. Notice 2020-50 states that an employer is under no obligation to “inquire into whether an individual has satisfied the conditions” of eligibility.
Sample Employee Certification Provided
Notice 2020-50 includes a sample of what the IRS considers “an acceptable certification.”
If an employer has adopted provisions allowing CRDs, they will be reported on IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc. Notice 2020-50 states that for CRDs made to participants (other than beneficiaries) who are otherwise subject to the 10 percent early distribution penalty tax, Code 2, Early distribution, exception applies, may be used. Alternatively, Code 1, Early distribution, no known exception, may be used. (A qualified individual can claim exemption from the 10 percent penalty tax on his individual income tax return if he qualifies for a CRD, regardless of how Form 1099-R is coded.)
Reliance on Employee Certification for Recontributions
Employers that allow recontributions of CRDs are allowed to rely on an employee-participant’s certification that she is a qualified individual, unless the employer has actual knowledge to the contrary.
A qualified individual will report CRDs as distributions and as repayments—if made—on new Form 8915E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments. This is a form in the same series used for certain prior disaster events, such as Hurricane Katrina. A taxpayer can claim CRD status even if distributions were received from a retirement plan whose sponsoring employer did not elect to add CRDs as a distributable event.
Examples of Tax Treatment
Notice 2020-50 provides several examples of tax impacts when both CRDs and repayments occur. These include amending a prior year’s tax return to account for recontributions made later in the three-year ratable taxation period, and choosing to carry forward or carry back—to future or prior years—the tax impact of a repayment that is made during the three-year ratable taxation period.
No Modification of Substantially Equal Periodic Payments
A CRD received by an eligible individual is not to be considered a modification of a series of substantially equal periodic payments as an exemption from the 10 percent early distribution penalty tax.
Deadline to Take Plan Loan Confirmed
Notice 2020-50 confirmed that the final day to take a CARES Act retirement plan loan, including the enhanced loan amount, is September 22, not September 23.
Plan Loan Suspension Safe Harbor
Notice 2020-50 provides a safe harbor for loan repayment when a loan payment suspension is permitted by the employer under CARES Act provisions. Among its conditions: loan payments must resume at the end of the suspension period; the loan’s term may be extended up to one year from the date originally required to be repaid; interest accrued during the suspension period must be added to the remaining loan principal amount; and the loan must be reamortized and repaid in substantially level amounts over the remaining period of the loan.
Notice 2020-50 recognizes that there may be other reasonable interpretations of the CARES Act loan provisions in addition to the Notice’s safe harbor.
Participant Certification as Eligible Individual
Employers that adopt the CARES Act enhanced loan provisions are allowed to rely on an employee-participant’s certification that he is an qualified individual, unless the plan administrator has actual knowledge to the contrary.