IRS Issues Guidance for COVID-19 Distributions from Retirement Plans
The Internal Revenue Service (IRS) issued Notice 2020-50 to provide guidance on coronavirus-related distributions under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). This alert summarizes the key provisions of Notice 2020-50.
Section 2202 of the CARES Act provides that qualified individuals receive favorable tax treatment with respect to distributions from eligible retirement plans1 that are coronavirus-related distributions. A coronavirus-related distribution (i) is not subject to the 10% additional tax under § 72(t) of the Internal Revenue Code (Code) (including the 25% additional tax under § 72(t)(6) for certain distributions from SIMPLE IRAs), (ii) may be includible in income over a 3-year period, and, (iii) to the extent the distribution is eligible for tax-free rollover treatment and is contributed to an eligible retirement plan within a 3-year period, will not be includible in income. Section 2202 of the CARES Act also increases the allowable plan loan amount under § 72(p) of the Code and permits a suspension of payments for plan loans outstanding on or after March 27, 2020, that are made to qualified individuals. See Cheiron’s previous alert, Retirement Plan Distributions Permitted by the CARES Act.
Guidance Under Notice 2020-50
- Expanded Definition of Qualified Individual: In addition to the categories of qualified individuals listed in § 2202(a)(4)(A)(ii) of the CARES Act, Notice 2020-50 expands the definition of qualified individual to 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- the individual having a reduction in pay (or self-employment income) due to COVID-19, having a job offer rescinded, or having a start date for a job delayed due to COVID-19;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childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; or
- the closing or reducing of 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 is someone who shares the individual’s principal residence.
- Definition and Designation of Coronavirus Distributions: The CARES Act defines a coronavirus-related distribution2 as any distribution from an eligible retirement plan made on or after January 1, 2020, and before December 31, 2020, to a qualified individual up to $100,000. Notice 2020-50 clarifies that:
- The qualified individual is permitted to designate a distribution as a coronavirus-related distribution, without regard to the treatment by the plan.
- Periodic payments and distributions that would have required minimum distributions but for § 2203 of the CARES Act received by an individual on or after January 1, 2020, and before December 31, 2020, are permitted to be coronavirus-related distributions and thus are permitted to be included in income ratably over 3 years.
- The CARES Act does not limit these distributions to amounts withdrawn solely to meet a need arising from COVID-19. Thus, for example, for a qualified individual, coronavirus-related distributions are permitted without regard to such individual’s need for funds, and the amount of the distribution is not required to correspond to the extent of the adverse financial consequences experienced by such individual.
- With respect to the designation of a coronavirus distribution, it is possible that a qualified individual’s designation of a coronavirus-related distribution on his or her federal tax return3 may be different from the employer retirement plan’s treatment of the distribution.
CHEIRON OBSERVATION: Ideally, plan sponsors will coordinate with participants and communicate to them how the coronavirus-related distributions will be coded by the plan for tax purposes. Without some coordination, the plan may treat a distribution differently than the way the participant intends for it to be treated. For example; some payments (such as lump sum payments) may have the 20% withholding applied even though the participant intends to treat them as coronavirus-related distributions that are not subject to withholding.
- Coronavirus-related distributions that are permitted to be recontributed: Only a coronavirus-related distribution that is eligible for tax-free rollover treatment under § 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16) is permitted to be recontributed to an eligible retirement plan, and that recontribution will be treated as having been made in a trustee-to-trustee transfer to that eligible retirement plan. Note that hardship distributions, which typically are ineligible for rollover, will not be treated as made on account of hardship if they otherwise meet the requirements for a coronavirus distribution. Thus, such hardship distributions will be eligible for rollover. However, any coronavirus-related distribution (whether from an employer retirement plan or an IRA) paid to a qualified individual as a beneficiary of an employee or IRA owner (other than the surviving spouse of the employee or IRA owner) cannot be recontributed.
- Guidance for Retirement Plans Making Coronavirus-Related Distributions: Notice 2020-50 provides the following additional guidance:
- Coronavirus-related distributions generally treated as satisfying certain plan distribution restrictions: While an employer may expand the distribution options under its plan to allow an amount attributable to an elective, qualified nonelective, qualified matching, or safe harbor contribution under a qualified cash or deferred arrangement to be distributed as a coronavirus-related distribution even though it is distributed before an otherwise permitted distributable event (such as severance from employment, disability, or attainment of age 59½), the CARES Act otherwise does not change the rules for when plan distributions are permitted to be made from employer retirement plans. Thus, a pension plan is not permitted to make a distribution before an otherwise permitted distributable event merely because the distribution, if made, would qualify as a coronavirus-related distribution. Further, a pension plan is not permitted to make an exception to applicable requirements for a qualified joint and survivor annuity merely because the distribution, if made, could be treated as a coronavirus-related distribution.
- Direct rollover, § 402(f) notice, and 20% withholding requirements are not applicable to coronavirus-related distributions: If a distribution is treated as a coronavirus-related distribution by an employer retirement plan, the rules for eligible rollover distributions are not applicable to such distribution. Thus, the plan is not required to offer the qualified individual a direct rollover with respect to the distribution. In addition, the plan administrator is not required to provide a § 402(f) notice. Finally, the plan administrator or payor of the coronavirus-related distribution is not required to withhold an amount equal to 20% of the distribution. However, a coronavirus-related distribution is subject to the voluntary tax withholding requirements of § 3405(b) and § 35.3405-1T.
- Treatment of distributions as coronavirus-related distributions: An employer is permitted to choose whether, and to what extent, to treat distributions under its plans as coronavirus-related distributions, as well as whether, and to what extent, to apply coronavirus-related plan loan rules. Thus, for example, an employer may choose to provide for coronavirus-related distributions but choose not to change its plan loan provisions or loan repayment schedules. Further, the employer (or plan administrator) is permitted to develop any reasonable procedures for identifying which distributions are treated as coronavirus-related distributions under its retirement plans. However, the plan sponsor must be consistent in its treatment of similar distributions and count distributions from all retirement plans maintained by an employer towards the $100,000 limit on coronavirus-related distributions.
- Reliance on certifications: The administrator of an eligible retirement plan may rely on an individual’s certification that the individual satisfies the conditions to be a qualified individual in determining whether a distribution is a coronavirus-related distribution, unless the administrator has actual knowledge to the contrary. The requirement that an administrator not have “actual knowledge” that is contrary to an individual’s certification does not mean that the administrator has an obligation to inquire into whether an individual has satisfied the conditions to be a qualified individual. Rather, this requirement is limited to situations in which the administrator already possesses sufficiently accurate information to determine the veracity of a certification. Notice 2020-50 includes an example of an acceptable certification.
- Retirement plan will be treated as operating in accordance with its terms if timely amended: A retirement plan will not be treated as failing to operate in accordance with its terms merely because the plan implements the provisions of section 2202 of the CARES Act, if the employer amends the plan by the last day of the first plan year beginning on or after January 1, 2022, (for governmental plans, by the last day of the first plan year beginning on or after January 1, 2024) to make retroactive conforming changes.
- Guidance for Plans Making or Accepting Recontribution of Coronavirus-Related Distributions:
- Tax reporting on coronavirus-related distributions: An eligible retirement plan must report the payment of a coronavirus-related distribution to a qualified individual on Form 1099-R using the appropriate distribution code, even if the qualified individual recontributes the coronavirus-related distribution to the same eligible retirement plan in the same year. If no other appropriate code applies, the payor is permitted to use distribution code 2 or distribution code 1 in box 7 of Form 1099-R.
- Accepting recontributions of coronavirus-related distributions: Generally, a qualified individual who receives a coronavirus-related distribution that is eligible for tax-free rollover treatment is permitted to recontribute, at any time in a 3-year period, any portion of the distribution to an eligible retirement plan that is permitted to accept eligible rollover contributions. The plan administrator of an eligible retirement plan that accepts rollover distributions may rely on an individual’s certification that the individual satisfies the conditions to be a qualified individual in determining whether a distribution is a coronavirus-related distribution unless the administrator has actual knowledge to the contrary.
- Guidance for Individuals Receiving Coronavirus-related Distributions:Notice 2020-50 provides detailed guidance for qualified individuals on reporting coronavirus-related distributions. Generally, to obtain favorable tax treatment, a qualified individual receiving a coronavirus-related distribution must report the distribution on the individual’s federal income tax return for 2020 and Form 8915-E, or by filing just Form 8915-E. Form 8915-E, Qualified 2020 Disaster Retirement Distributions and Repayments, which is expected to be available before the end of 2020.
Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Accordingly, we do not provide legal services or tax advice.
1 Under Code Section 402(c)(8) an eligible retirement plan includes an individual retirement arrangement (IRA) under § 408(a) or (b), a qualified plan under § 401(a), an annuity plan under § 403(a), a § 403(b) plan, and a governmental deferred compensation plan under § 457(b).
2 However, the following amounts are not coronavirus-related distributions: corrective distributions of elective deferrals and employee contributions that are returned to the employee (together with the income allocable thereto) in order to comply with the § 415 limitations, excess elective deferrals under § 402(g), excess contributions under § 401(k), and excess aggregate contributions under § 401(m); loans that are treated as deemed distributions pursuant to § 72(p); dividends paid on applicable employer securities under § 404(k); the costs of current life insurance protection; prohibited allocations that are treated as deemed distributions pursuant to § 409(p); distributions that are permissible withdrawals from an eligible automatic contribution arrangement within the meaning of § 414(w); and distributions of premiums for accident or health insurance under § 1.402(a)-1(e)(1)(i).
3 Notice 2020-50 notes that the individual is entitled to treat the distribution as a coronavirus-related distribution for purposes of the individual’s federal income tax return only if the individual actually meets the eligibility requirements.