By Jeremiah D. Wood
The IRS has provided additional guidance regarding the coronavirus-related distributions, the modification to plan loans made to individuals impacted by COVID-19, and the 2020 waiver of the required minimum distributions. To see the original article we published related to these topics, click here. This article will provide an update to such article as provided in the recently released additional guidance from the IRS in Notices 2020-50 and 2020-51.
Coronavirus-Related Distributions
IRS Notice 2020-50 expanded the individuals who are allowed to use the coronavirus-related distribution and use the CARES Act loan modifications. Such individuals include the following:
- individuals who have been diagnosed with SARS-CoV-2 or coronavirus disease 2019 (referred to as COVID-19) by a test approved by the Centers for Disease Control (including a test authorized under the Federal Food, Drug, and Cosmetic Act),
- an individual whose spouse or dependent has been diagnosed with one of these viruses by the same approved test, or
- an individual who experiences adverse financial consequences, due to COVID-19, as a result of
- the individual, the individual’s spouse, or a member of the individual’s household (as defined below):
- being quarantined, furloughed, laid off, or having reduced working hours,
- having a reduction in pay (or self-employment income),
- having a job offer rescinded or start date for a job delayed, or
- being unable to work due to lack of child care;
- the closing or reducing hours of a business owned or operated by the individual, the individual’s spouse, or a member of the individual’s household.
The Secretary of the Treasury may issue additional factors determined to allow an individual to take a coronavirus-related distribution.
A member of an individual’s household is someone who shares the individual’s principal residence. The plan administrator is allowed to rely on a certification provided by the individual that they meet one of the situations listed above. The plan administrator is not required to inquire about the financial hardship of an individual requesting a coronavirus-related distribution because the amount distributed does not have to be related to the amount of financial hardship the individual experiences due to COVID-19.
The ability to recontribute the coronavirus-related distribution over a 3-year period is only applicable if the coronavirus-related distribution was an eligible rollover distribution.
Generally, most distributions for a coronavirus-related distribution would be an eligible rollover distribution. However, the following distribution/withdrawals are not eligible to be considered a coronavirus-related distribution:
- corrective distributions necessary to satisfy the Code §415 limitations;
- return of excess elective deferrals over the Code §402(g) limit—i.e., the $19,500 limit in 2020);
- return of excess amounts under Code §§401(k) & 401(m)—i.e., amounts returned due to a failure of the ADP or ACP tests;
- loans that are treated as deemed distributions;
- permissible withdrawals from an eligible automatic contribution arrangement;
- dividends paid on employer stock held by the plan;
- prohibited allocations that are treated as deemed distributions pursuant to Code §409(p) — relevant for ESOPs sponsored by a subchapter S-corporation;
- the costs of current life insurance protection—i.e., PS 58 costs; and
- distributions of premiums for accident or health insurance.
- Even though the plan may expand the distribution options to allow for a coronavirus-related distribution and these are exempt from the pre-age 59½ limitation, the rules for plan distribution are not otherwise modified. Thus, a coronavirus-related distribution does not exempt the plan from obtaining spousal consent if it is otherwise necessary.
The plan administrator will report the coronavirus-related distribution on a Form 1099-R, and this is required regardless of the intentions of the participant receiving the distribution (i.e., if the participant intends to recontribute the funds). The plan administrator is permitted to use either distribution code 1 or 2 in box 7 of the Form 1099-R. The individual receiving a coronavirus-related distribution is required to use Form 8915-E to report the coronavirus-related distribution.
If a plan is accepting a recontribution of a coronavirus-related distributions, then the plan administrator must reasonably conclude that the recontribution is eligible for direct rollover treatment and is indeed from a coronavirus-related distribution. The plan administrator may rely on an individual’s certification that the funds were from a coronavirus-related distribution, unless the administrator has actual knowledge to the contrary. The actual knowledge standard, however, does not require the plan administrator to investigate the veracity of the participant’s certification.
Retirement Plan Loans
As discussed in the original article on these issues, if any loan repayments are due between March 27, 2020, and December 31, 2020, such repayments may be delayed for one year from the original due date. The suspension only applies to repayments due on or after March 27, 2020 through December 31, 2020, so the repayments on the loan would start again under the normal payment schedule on or after January 1, 2021. IRS Notice 2020-50 provides plan administrators with a safe harbor when calculating the repayments after such delay. The safe harbor provides that a plan administrator will satisfy the CARES Act requirements if the outstanding loan balance (including interest accrued during the suspension of repayments) is reamortized and repaid in substantially level installments over the remaining period of the loan (i.e., 5 years from the date of the loan, if it was not a principal residence loan, plus up to 1 year from the date the loan was originally due to be repaid) beginning with the first repayment due after the suspension is over (i.e., repayments due on or after January 1, 2021).
Delay in Required Minimum Distributions Due in 2020
The CARES Act provides for a one-year delay of required minimum distributions (RMDs) that were due during 2020 — except for RMDs from defined benefit plans. Pursuant to IRS Notice 2020-51, the IRS is allowing distributions made as an RMD during 2020 (regardless when these were made during 2020) to be rolled over to (or back into) a qualified plan or an IRA provided the rollover occurs by the later of (i) 60-days from receipt of the distribution or (ii) August 31, 2020.
Additionally, at the end of 2019 the SECURE Act modified the RMD rules to provide that a participant (or IRA owner) is not required to start taking his/her RMDs until April 1 of the calendar year following the calendar year in which they attain age 72 (as opposed to 70 ½ under prior law), but this modification only applied to an individual who attained age 70½ on or after January 1, 2020 (those who attained age 70½ prior to such date used the old rules). Since this change in the law was not known until late in 2019, some participants (or IRA owners) who attained age 70 ½ on or after January 1, 2020 may have taken an RMD when it was not required. The rollover option discussed above for RMDs paid during 2020 also applies to these individuals; in other words, an individual who took a distribution that was improperly characterized as an RMD because they attained age 70½ on or after January 1, 2020, are allowed to roll these funds back into the plan or into an IRA before the later of (i) 60-days from receipt of the distribution or (ii) August 31, 2020.
Employers sponsoring a plan that would otherwise be required to make RMDs during 2020 must determine what the default (i.e., when there is no participant or beneficiary election) will be: either (i) continue to make distributions that would otherwise be an RMD during 2020 or (ii) suspend such distributions during 2020.
Additionally, IRS Notice 2020-51 provides for the following:
- The repayment of the 2020 RMD is not included in the limitation of one rollover per 12 months.
- Non-spouse beneficiaries are able to repay the 2020 RMD even though these individuals are normally prohibited from making rollovers of IRA distributions.
- The waiver of the 2020 RMD does not change an individual’s required beginning date for purposes of future RMDs.
The election period a beneficiary has to elect the type of RMD payout he/she will receive upon the death of a participant (e.g., under the 5-year rule or the life expectancy rule) is extended. Normally, if this is allowed in the plan, the election has to be made by the end of the year following the participant’s death, but IRS 2020-51 provides a 1-year extension to this election period if it would otherwise end in 2020.
Also, the time for a nonspouse beneficiary to directly roll over an inherited qualified plan balance to an IRA is extended to the end of 2021. This would apply if a participant died in 2019.
If you have any questions regarding any of the CARES Act or SECURE Act modifications to the rules for qualified plans, please reach out to us.
Jeremiah D. Wood practices in the firm’s Employee Benefits and Executive Compensation Practice Group. His practice includes experience in the design, implementation, administration and termination of tax-qualified retirement plans (including traditional pension plans, cash balance plans, profit sharing plans, 401(k) plans, and ESOPs), 403(b) plans, nonqualified deferred compensation plans (including 457(b) and 457(f) plans and deferral compensation arrangements for executives) and health and welfare plans. He works for a variety of clients, including Fortune 500 companies, local and regional financial institutions, privately held business organizations, professional corporations, governmental organizations and non-profit organizations.
Disclaimer: The information included here is provided for general informational purposes only and should not be a substitute for legal advice nor is it intended to be a substitute for legal counsel. For more information or if you have further questions, please contact one of our Attorneys.