Compliance Alert: IRS Releases Long-Anticipated Guidance on CARES Act Loans/Distributions
On June 19, 2020, the IRS released Notice 2020-50, providing guidance on the CARES Act distributions for which many plan sponsors have been eagerly awaiting. While much of the guidance is confirmation of what plan sponsors already knew, a preliminary reading reveals some significant new provisions, including:
The list of permissible COVID-19-related distributions with favorable tax treatment has been expanded. —
Previously, the CARES Act waived the 10% early withdrawal tax penalty on early withdrawals up to $100,000 per year from retirement plans/IRAs, spread the tax burden out over three tax years, permitted distribution repayment, and allowed retirement plans to permit distributions for an individual who certifies that he/she:
- Is diagnosed with COVID-19
- Has a spouse or dependent that is diagnosed with COVID-19
- Experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, has a reduction in hours, is unable to work because of lack of child care due to COVID-19, is forced to close or reduce hours of a business they own or operate due to COVID-19; or other factors, as determined by the Treasury Secretary
While “other factors, as determined by the Treasury Secretary” was understood to be quite flexible, we now have the following guidance:
- The individual has a reduction in pay (or self-employment income) due to COVID-19 or has a job offer rescinded or start date for a job delayed due to COVID-19
- Due to COVID-19, the individual’s spouse or a member of the individual’s household (defined as someone who shares the individual’s principal residence) is quarantined, furloughed or laid off, has work hours reduced, is unable to work because of lack of childcare, has a reduction in pay (or self-employment income), or has a job offer rescinded or start date for a job delayed
- A business owned or operated by the individual’s spouse or a member of the individual’s household is forced to close or reduce hours due to COVID-19
This guidance significantly increases the number of the individuals eligible for COVID-19 distributions (and loans, since the eligibility criteria is the same), assuming the retirement plan permits these distributions and/or loans.
There is a safe harbor that plan sponsors can now follow for the administration of the delay in loan repayments due through the end of 2020. — The safe harbor provides important clarification that the term of the loan may be extended for up to one year from the date the loan was originally due to be repaid. Thus, plan sponsors will likely see a reduction in resumed loan repayments, because the amount of time by which the loan repayment period can be extended (one year) significantly exceeds the maximum period of time for which loan repayments could be missed (March 27th to December 31st 2020, or approximately nine months). While the safe harbor is not required, and the IRS gives an alternate example of administration of the pay that would comply with the rules, we suspect that many plan sponsors, in working with their recordkeepers, will satisfy the safe harbor.
Model self-certification language for a COVID-19 distribution was provided. — Again, while the model language is not required, we anticipate that many plan sponsors will use it.
Amounts that are not eligible rollover distributions cannot be treated as COVID-19 distributions. — Thus, distributions such as excess deferral refunds, deemed distributions resulting from loan defaults, and permissible withdrawals from an Eligible Automatic Contribution Arrangement cannot be treated as COVID-19 distributions. However, the notice does not appear to clarify whether Roth conversions can be treated as COVID-19 distributions.
COVID-19 distribution repayments will not count toward the one IRA rollover per year limit. — IRAs normally have a limit of one rollover per year, but this notice exempts COVID-19 distributions that are re-contributed from that rule.
409A non-qualified deferred compensation plans (including 457(f) plans) can cancel deferral elections for those who receive a COVID-19 distribution. — Under Section 409A, deferral elections must be made by the end of the taxable year before the year in which deferrals are made. Thus, many participants whose financial circumstance have changed were locked into 2020 compensation deferral elections that were made in 2019. The guidance provides relief by allowing these elections to be canceled (although, not delayed).
In addition to the clarification above, this notice confirmed that loan repayment delays are only available for participants who qualify for a COVID-19 distribution. A recent Q&A contained language implying that all participants were eligible for loan repayment delays, but that turned out to be erroneous.
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Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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