In June, the IRS issued three notices that provide guidance and clarification to various Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and Setting Every Community Up for Retirement Enhancement Act (SECURE Act) benefits provisions:
Notice 2020-50: Guidance for Coronavirus-Related Distributions and Loans from Retirement Plans Under the CARES Act
Under the CARES Act, employees may take a coronavirus-related distribution (CRD) from a defined contribution retirement plan –IRA, 403(b), 457(b) or 401(k) – between January 1 and December 31, 2020, if a plan participant certifies to a plan administrator that he or she:
- Has been diagnosed with COVID-19;
- Has a spouse or dependent diagnosed with COVID-19; or
- Has been laid off, furloughed, suffered a reduction in work hours, are unable to work due to lack of childcare, or unable to work due to COVID-19.
Notice 2020-50 expands these qualifications to include the following:
- Has had a reduction in pay or self-employment income or had a job offer rescinded or a delayed start for a new job due to COVID-19;
- Has a spouse or member of the household who had a reduction in pay or self-employment income, had a job offer rescinded or a delayed start for a new job, or is unable to work due to lack of childcare due to COVID-19; or
- Is a business owner or has a business owner spouse whose business has been closed or is operating under reduced hours due to COVID-19.
Coronavirus-Related Distributions (CRDs)
Eligible employees can withdraw up to $100,000 from their retirement accounts as a CRD. While the distributions are taxable, CRDs qualify for special tax treatment under the CARES Act:
- The 10% tax penalty is waived, although withdrawals are still taxed as ordinary income;
- Withdrawals will not be subject to mandatory 20% withholding from an early distribution;
- The total withdrawal amount can be spread over three years for tax purposes; and
- Participants have up to three years to return funds, which can be paid back to any eligible retirement plan with no tax consequence.
Notice 2020-50 provides that CRDs include the following:
- Periodic payments;
- Distributions that would have been considered required minimum distributions (RMDs) if the CARES Act had not waived RMDs for 2020;
- Beneficiary distributions; and
- A reduction or offset of a qualified individual’s account balance in order to repay a plan loan.
In addition, Notice 2020-50 provides that CRDs do NOT include the following:
- Corrective distributions of elective deferrals and employee contributions that are returned to the employee (together with the income allocable thereto) 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).
Repayment of CRDs
A borrower is required to repay a portion or all of a CRD to an eligible retirement plan within three years from the loan distribution date. Notice 2020-50 stipulates that CRDs may only be repaid if they would otherwise qualify as an eligible rollover distribution. If a hardship distribution qualifies as a CRD, that distribution may also be repaid to an eligible retirement plan. Plans that do not accept rollover contributions are not required to accept repayments.
For distributions that are treated as CRDs by an employer plan, the rules under Code Sections 401(a)(31), 402(f), and 3405 for eligible rollover distributions do not apply. Therefore, the employer plan is not required to offer a direct rollover for a CRD, provide a 402(f) notice, or withhold 20% from the CRD.
The CARES Act allows a plan to suspend loan repayments for up to one year and Notice 2020-50 provides a safe harbor method for suspending loan repayment rules under the CARES Act. If a plan suspends loan repayment for loans taken during the “suspension period” -- March 27-December 31, 2020 -- the IRS will treat the plan as satisfying the requirements of Code Section 72(p). Loan repayments must resume following the suspension period, and the plan is allowed to extend the loan term by up to one year from the original due date of the loan. However, interest on the loan will still accrue in 2020.
CRD Tax Reporting
Individuals receiving a CRD must report it using Form 1099-R, even if the CRD is repaid to the same plan in the same year. Payors are allowed to use distribution code 1 (early distribution, no known exception) or distribution code 2 (early distribution, exception applies) in box 7 of Form 1099-R if no other code applies.
Notice 2020-51: Guidance on Waiver of 2020 Required Minimum Distributions (RMDs)
The SECURE Act extended the age for beginning RMDs to 72 for all those who turned 70 ½ after December 31, 2019.
The CARES Act suspended required minimum distributions (RMDs) from tax-deferred retirement accounts for 2020. Per Notice 2020-51, the IRS permits individuals that have already taken a 2020 RMD to treat that distribution as an eligible rollover distribution by extending the 60-day rollover period to August 31, 2020.
In addition to the rollover opportunity, an IRA owner or beneficiary who already received a distribution from an IRA that would have been an RMD in 2020 can repay the distribution to the IRA by August 31, 2020. This repayment is also not subject to the one rollover per 12-month period limitation and the restriction on rollovers for inherited IRAs.
Notice 2020-51 provides two sample amendments that employers may use to give plan participants and beneficiaries whose RMDs are waived a choice of whether to receive the waived distribution, as well as question-and-answer guidance about other issues related to the relief.
Notice 2020-52: COVID-19 Relief and Other Guidance on Mid-Year Reductions or Suspensions of Contributions to Safe Harbor § 401(k) and § 401(m) Plans
Notice 2020-52 provides guidance to plan sponsors that have suspended or are considering suspending safe harbor matching contributions or safe harbor nonelective contributions due to COVID-19.
Clarification of Requirements for Reducing Contributions Made on Behalf of HCEs
Notice 2020-52 clarifies that since 401(k) safe harbor regulations only require that safe harbor contributions be made to non-highly compensated employees (NHCEs), a mid-year reduction of contributions to highly compensated employees (HCEs) does not impact safe harbor status. HCEs need to be provided an updated safe harbor notice and election opportunity prior to any suspension of contributions.
Temporary COVID-19 Relief Regarding Reductions or Suspensions of Safe Harbor Contributions
For a plan sponsor to reduce or suspend safe harbor contributions mid-year, it is required that the plan sponsor must either be (1) operating at an economic loss during the plan year, or (2) the plan’s safe harbor notice includes a notice allowing for the reduction or suspension of safe harbor contributions. Notice 2020-52 allows for plans that reduce or suspend safe harbor contributions between March 13, 2020, and August 31, 2020, to be treated as meeting these threshold requirements.
Expanded Deadline Notice for Mid-Year Suspension of Safe Harbor Nonelective Contributions
Notice 2020-52 expands the deadline for advance notification of reductions or suspensions to safe harbor nonelective contributions from 30 days in advance of the effective date to August 31, 2020, as long as an updated safe harbor notice is provided by August 31, 2020, and the plan amendment is adopted prior to the effective date. The 30-day notice rule for mid-year reductions or suspensions to safe harbor matching contributions remains in effect.
The Hall Benefits Law team has been paying careful attention to this evolving area of employee benefits regulation and will continue to provide updates. To speak with someone about how we can be a resource for your employee benefits legal compliance needs, call 678-439-6236, or visit the Hall Benefits Law website for more details.