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IRS Releases Important Guidance Regarding Coronavirus-Related Distributions, Loans and RMD Waivers under the CARES Act

On June 19, 2020, the Internal Revenue Service ("IRS") issued Notice 2020-50, which provides additional guidance regarding coronavirus-related distributions and loans under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. While the Notice largely formalizes guidance the IRS set forth in a series of questions and answers in May that we outlined in a prior e-alert, the Notice provides clarifications and additional details on the application of coronavirus-related distributions and loans under the CARES Act. Most significantly, the Notice expands the categories of individuals who are eligible for coronavirus-related distributions and loans under the CARES Act.

On June 23, 2020, the IRS issued Notice 2020-51, which provides guidance on the waiver of 2020 required minimum distributions ("RMDs") under the CARES Act. The CARES Act waives RMDs for defined contribution plans and IRAs for calendar year 2020. The 2020 RMD waiver is similar to the 2009 RMD waiver under the Worker, Retiree, and Employer Recovery Act of 2008 ("WRERA"), and the transition relief and guidance provided in Notice 2020-51 is, therefore, similar to that provided with respect to the 2009 RMD waiver. Notice 2020-51 also provides transition relief related to the change in the required beginning date for RMDs under the Setting Every Community Up for Retirement Enhancement Act of 2019 ("SECURE Act").

Background

As explained in our prior e-alerts, the CARES Act permits coronavirus‑related distributions to qualified individuals. A coronavirus-related distribution is a distribution that is made from an eligible retirement plan to a qualified individual on or after January 1, 2020, but before December 31, 2020, up to an aggregate limit of $100,000 from all plans and IRAs. The 10% additional tax on early distributions does not apply to coronavirus-related distributions.

In addition, the CARES Act provides loan relief for qualified individuals. Specifically, a plan is permitted to temporarily increase the maximum loan amount available to qualified individuals, up to the lesser of $100,000 (minus any outstanding loans) or the participant's vested benefit under the plan, for loans issued before September 23, 2020. A plan may also permit loan repayments for qualified individuals to be delayed for one year.

The CARES Act also provided for a waiver of RMDs for defined contribution plans and IRAs for calendar year 2020. The waiver applies to any RMD required to be paid in 2020 and 2019 RMDs required to be paid by April 1, 2020 (if not already paid in 2019).

Guidance on Coronavirus-Related Distributions

Expanded Definition of Qualified Individual

In order to take advantage of coronavirus-related distributions or the expanded loan provisions under the CARES, an individual must be a "qualified individual." The CARES Act defines a "qualified individual" as an individual who:

is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention, or
has a spouse or dependent diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention, or
experiences adverse financial consequences as a result of (i) being quarantined, furloughed or laid off or having work hours reduced due to COVID-19, (ii) being unable to work due to lack of child care due to COVID-19, (iii) being unable to work due to closing or reducing hours of a business owned or operated by the individual due to COVID-19, or (iv) other factors as determined by the Secretary of the Treasury.

Notice 2020-50 expands the definition of "qualified individual" to also include an individual who experiences adverse financial consequences as a result of:

the individual 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 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, 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; or
closing or reducing hours of a business owned or operated by the individual's spouse or a member of the individual's household due to COVID-19.

For purposes of applying these additional factors, a "member of the individual's household" means someone who shares the individual's principal residence.

Definition of Coronavirus-Related Distribution

In general, a qualified individual may designate a distribution as a coronavirus-related distribution on his or her tax return if it meets the requirements of a coronavirus-related distribution even if the plan does not permit coronavirus-related distributions. Notice 2020-50 provides that coronavirus-related distributions include: (i) periodic payments, (ii) distributions that would have been required minimum distributions (RMDs) except for the CARES Act waiver of RMDs for 2020, (iii) distributions to beneficiaries, and (iv) reductions or offsets of a participant's account balance in order to repay a loan.

However, Notice 2020-50 provides that coronavirus-related distributions do not include corrective distributions made to comply with applicable IRS limits or nondiscrimination rules, defaulted loans treated as deemed distributions, distributions of automatic elective deferrals under an eligible automatic contribution arrangement, as well as other amounts described in Treasury Regulation Section 1.402(c)-2, Q&A 4 as not eligible for rollover.

Repayments of Coronavirus-Related Distributions

A qualified individual may repay all or part of a coronavirus-related distribution to an eligible retirement plan, provided that the qualified individual completes the repayment within three years of the date of the distribution. Notice 2020-50 clarifies that a coronavirus-related distribution may be repaid only if it otherwise qualifies as an eligible rollover distribution.

In addition, Notice 2020-50 also provides that if a hardship distribution qualifies as a coronavirus-related distribution, the distribution will not be treated as having been made on account of hardship and may be repaid to an eligible retirement plan. However, a coronavirus‑related distribution made to a qualified individual who is a beneficiary of an employee or IRA owner (other than a surviving spouse) cannot be repaid.

A qualified individual may repay a coronavirus-related distribution to any eligible retirement plan that is permitted to accept eligible rollover contributions. A plan administrator accepting repayment of a coronavirus-related distribution must reasonably conclude that the repayment is eligible for direct rollover treatment under the CARES Act, but may rely on the participant's certification that he or she is a qualified individual in making this determination. Consistent with the IRS' earlier guidance, Notice 2020-50 states that the IRS anticipates that eligible retirement plans will accept repayments, but that if a plan does not accept rollover contributions, it is not required to accept repayments.

Direct Rollover, Notice, and Withholding Requirements

Notice 2020-50 provides that if a distribution is treated as a coronavirus-related distribution by an employer retirement plan, the rules for eligible rollover distributions under Code Sections 401(a)(31), 402(f), and 3405 do not apply to the distribution. Thus, the plan is not required to offer a qualified individual a direct rollover with respect to the coronavirus-related distribution, provide a 402(f) notice to the qualified individual, or withhold 20% from the distribution, as is usually required.

Certification of Qualified Individual Status

Notice 2020-50 reiterates that a plan administrator may rely on a participant's certification that the participant is a qualified individual, unless the administrator has actual knowledge to the contrary. This reliance extends to the special treatment for loans, as well as for coronavirus-related distributions. The Notice provides that an administrator does not have an obligation to inquire as to whether an individual has satisfied the conditions to be a qualified individual, but rather that the "actual knowledge" requirement is limited to situations in which the administrator already possesses sufficiently accurate information to determine the veracity of a certification. The Notice helpfully includes a sample certification for plan administrators.

Tax Reporting of Coronavirus-Related Distribution

Notice 2020-50 provides that a coronavirus-related distribution must be reported on a Form 1099-R even if the qualified individual repays the distribution to the same plan in the same year. The Notice further provides that if a payor is treating the payment as a coronavirus-related distribution and no other appropriate code applies, the payor is permitted to use distribution code 2 (early distribution, exception applies) in box 7 of Form 1099-R. Alternatively, a payor may use distribution code 1 (early distribution, no known exception) in box 7 of Form 1099-R.

Guidance on Loan Repayment Suspensions

The CARES Act permits a plan to suspend loan repayments for up to one year for qualified individuals. Notice 2020-50 provides a safe harbor method for satisfying the loan repayment suspension rules under the CARES Act.

Under the safe harbor, the IRS will treat a qualified employer plan as satisfying the requirements of Code Section 72(p) if the plan suspends a qualified individual's obligation to repay a plan loan under the plan for any period beginning not earlier than March 27, 2020, and ending not later than December 31, 2020 (suspension period). Loan repayments must resume after the end of the suspension period (i.e. January 1, 2021), and the plan may extend the term of the loan by up to one year from the date the loan was originally due to be repaid. If a qualified employer plan suspends loan repayments during the suspension period, the suspension will not cause the loan to be deemed distributed even if, due solely to the suspension, 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. The Notice provides that a plan satisfies these rules if the loan is reamortized and repaid in substantially level installments over the remaining period of the loan (that is, five years from the date of the loan, assuming that the loan is not a principal residence loan, plus up to one year from the date the loan was originally due to be repaid). If an employer chooses to permit a suspension period under its plan that is less than the maximum suspension period, the employer may extend the suspension period subsequently, but not beyond December 31, 2020.

The Notice adds that an employer is not required to use the safe harbor, and may use other reasonable methods for implementing the suspension of loan repayments under the CARES Act.

Guidance on 2020 RMD Waiver

Transition Relief Related to Required Beginning Date Change

Notice 2020-51 provides transition relief related to the SECURE Act change to the required beginning date for RMDs. A plan distribution made in 2020 to a participant who will attain age 70 ½ in 2020 that would have been an RMD but for the change in the required beginning date change to age 72 under the SECURE Act, is not required to be treated as a direct rollover subject to mandatory withholding or the 402(f) notice requirement. This transition relief is helpful to plan administrators and recordkeepers that improperly characterized distributions as RMDs because they were unable to update their systems and processes before January 1, 2020.

Transition Relief Related to 2020 RMD Waiver

Notice 2020-51 also provides transition relief related to the CARES Act waiver of 2020 RMDs:

The Notice provides that the following distributions can be rolled over into an eligible retirement plan, even if the distribution would normally be treated as part of a series of substantially equal periodic payments that would not be eligible for rollover:

— Distributions to a plan participant 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, if the distributions would have been RMDs in 2020 (or for 2020) but for the 2020 RMD waiver.
— For a plan participant with a required beginning date of April 1, 2021, distributions that are paid in 2021 that would have been an RMD for 2021 but for the 2020 RMD waiver.

While the CARES Act is clear that the 2020 RMD waiver applies to RMDs required by April 1, 2020 (to the extent not paid in 2019) and to RMDs required in 2020, Notice 2020-51 expands the 2020 RMD waiver to RMDs paid in 2020 and 2021 (for calendar year 2020) to a participant with a required beginning of April 1, 2021.
If a plan participant received a distribution in 2020 that would have been an RMD but for the 2020 RMD waiver, the IRS is extending the 60-day period to roll over the distribution to an eligible retirement plan until August 31, 2020.
If an individual received a distribution from an IRA in 2020 that would have been an RMD but for the 2020 RMD waiver, the IRS is extending the 60-day period to repay the distribution to the IRA until August 31, 2020. The repayment will not count against the one rollover a year limit, nor will the restriction on rollovers for non-spousal beneficiaries apply.

Guidance Related to 2020 RMD Waiver

Notice 2020-51 provides the following additional guidance related to the CARES Act waiver of 2020 RMDs:

If a plan permits a beneficiary to elect whether the 5-year rule or life expectancy rule applies in determining RMDs, the deadline for making that election is the end of the calendar year following the calendar year of the employee's death. Q&A-2 provides that a plan that provides such an election may be amended to extend the election that would otherwise need to be made by December 31, 2020, to December 31, 2021 instead.
Q&A-3 provides that the CARES Act extends the time to make a direct rollover for a nonspouse designated beneficiary of a participant who died in 2019. In such case, the nonspouse designated beneficiary has until the end of 2021 to make a direct rollover and use the life expectancy rule. IRS Notice 2007-7 is modified by this Q&A-3.
Q&A-5 provides that Code Section 401(a)(9)(l) waives the RMD for 2020 notwithstanding whether the required beginning date of the employee is April 1, 2021. Such an employee is not required to receive an RMD for 2020 before April 1, 2021, but must still receive the RMD for the 2021 calendar year by December 31, 2021.
Q&A-8 provides that a distribution from a plan (not from a defined benefit plan) may be rolled back to the same plan provided that the plan permits rollovers and that the rollover satisfies the requirements of Code Section 402(c).
Q&A-12 confirms that the 2020 RMD waiver under the CARES Act does not apply to 401(a) defined benefit plan, even if the defined benefit plan is using the defined contribution plan rules to determine the portion of a single sum distribution which would constitute an RMD.

Sample Plan Amendment

Notice 2020-51 includes a sample plan amendment for a defined contribution plan that plan sponsors can adopt to implement the 2020 RMD waiver. Plans must be amended to reflect the 2020 RMD waiver rules by the last day of the plan year beginning on or after January 1, 2022 (January 1, 2024, for governmental plans). The plan amendment must reflect the operation of the plan beginning with the effective date of the plan amendment. Importantly, adopting the sample plan amendment included in Notice 2020-51 will not cause a plan to lose reliance on a favorable opinion, advisory, or determination letter.

For additional information about Notice 2020-50 or Notice 2020-51 or for more information about the employee benefit implications of the COVID-19 pandemic and how they might affect your employee benefit plans, please contact any one of Ice Miller's Employee Benefits attorneys. Please contact our COVID-19 Task Force if you have any questions about managing the risks of the coronavirus pandemic. Also see our Coronavirus (COVID-19) Resource Center for additional resources, which is updated daily.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.