IRS Issues Additional Guidance on Coronavirus-Related Plan Distributions and Loans Under CARES Act | Stinson – Blog Benefits Notes
On Friday, June 19, 2020, the IRS issued Notice 2020-50 which provides additional guidance regarding Coronavirus Related Distributions (“CRD”) and Coronavirus Related Loans and Loan Repayment Delays (“CR Loan Relief ”) made available to certain pension plan members affected by COVID-19 under the CARES Act. The advisory expands, and in some cases modifies, previous guidelines issued by the IRS regarding CRDs and CRD loan relief discussed in our recent Blog. A discussion of the important information contained in the notice is provided below.
Expanded definition of “qualified person” eligible for CRD credits and CR loan relief
Notice 2020-50 expands the definition of “qualified person” (a person eligible for CRD or CR loan relief) to take into account additional factors such as salary cuts, cancellations of job offers. employment and delayed start dates for an individual, as well as the negative financial consequences for an individual resulting from the impact of COVID-19 on their spouse or household member.
Under the expanded definition provided in Notice 2020-50, “Qualified Person” is now defined as a person who:
- is diagnosed, or whose spouse or dependent is diagnosed with COVID-19 by certain approved tests; or
- suffers negative financial consequences because of the individual, the individual’s spouse or a member of the individual’s household (i.e. a person who shares the individual’s main residence):
- be quarantined, placed on leave or laid off, or have reduced working hours due to COVID-19;
- being unable to work due to lack of child care due to COVID-19;
- close or reduce the hours of operation of a business they own or operate due to COVID-19;
- have a reduced salary or self-employment income due to COVID-19; or
- have a canceled job offer or a delayed job start date due to COVID-19.
The notice clarifies that plan administrators can rely on an individual’s certification that they are a Qualified Individual (unless the plan administrator actually knows otherwise), but also notes that a individual must actually be a qualified individual in order to obtain favorable tax treatment in relation to a CRD. The notice provides an example of a certification that can be used by a person to certify that they meet the requirements to be a Qualified Person.
Distributions that can be treated as CRDs
In Notice 2020-50, the IRS confirms that in general, a Qualified Person is authorized to designate a distribution that meets the applicable requirements of the CARES Act as a CRD, regardless of whether the plan addresses the distribution. like a CRD. Notice 2020-50 further specifies that the amount of a CRD is not limited to amounts withdrawn solely to meet a need arising from COVID-19. Thus, a qualified natural person is allowed to take CRDs up to the limit of $ 100,000, regardless of their fund requirements.
Direct rollover, notification and hold requirements do not apply to CRDs
The notice and advance directives provide that a plan is not required to treat a plan distribution that meets the applicable requirements as a CRD. The notice clarifies that if a plan chooses to treat a distribution as a CRD, the rules relating to qualifying rollover distributions do not apply and the plan is not required to offer the individual a direct rollover in respect of the distribution and the plan administrator is not required to provide the person with a 402 (f) notice. In addition, CRD is not subject to the normally applicable 20% withholding requirement, but voluntary withholding requirements continue to apply.
Safe Harbor for the suspension of loan repayments
Under the CARES Act, a plan may allow a delay in certain loan repayments (typically, loan repayments with a due date between March 27, 2020 and December 31, 2020) without the loans being processed. as a deemed distribution under Code § 72. (p). For plans offering qualified individuals this reimbursement relief, the notice provides a safe haven to meet CARES requirements and avoid deemed distribution.
Under the Safe Harbor, a Qualified Person will be considered to have a deemed distribution if:
- the obligation to repay a loan from the Plan is suspended under the Plan for any period beginning no earlier than March 27, 2020 and ending no later than December 31, 2020 (the “Suspension Period”);
- loan repayments resume after the end of the suspension period and the loan term can be extended up to 1 year from the date the loan was originally due to be repaid;
- interest accrued during the suspension period is added to the remaining principal of the loan; and
- the loan is amortized and repaid in substantially uniform installments over the remaining term of the loan.
Use of the Safe Harbor is not required and the IRS has recognized that there may be other reasonable methods of administering the suspension of loan repayments.
Schemes accepting the re-contribution of CRDs
Under the CARES Act, a Qualified Person who receives a CRD that qualifies for the tax-free rollover treatment is generally allowed to contribute, at any time during the 3-year period beginning on the day after the date on which the distribution is received, any portion of the CRD (but not an amount in excess of the amount of the distribution), to a qualifying pension plan that accepts qualifying rollover contributions. A plan administrator can rely on an individual’s attestation that he or she is a qualified individual to determine whether the amount contributed was a CRD, unless the administrator has actual knowledge to the contrary.
CRD tax reporting by eligible pension plans
Notice 2020-50 details the reporting procedures for qualifying pension plans that issue CRDs. If an eligible pension makes a CRD, the plan must report the distribution on Form 1099-R even if the person re-contributes the CRD to the same plan in the same year. If no other appropriate code applies to the distribution, the plan is allowed to use distribution code 2 (early distribution, one exception applies) or distribution code 1 (early distribution, no known exceptions) in the distribution. box 7 of Form 1099-R.
CRD tax declaration by qualified individuals
Notice 2020-50 provides a detailed discussion of the reporting requirements and tax consequences applicable to Qualified Persons who receive CRDs. In general, a Qualified Person is permitted to designate any distribution that meets the applicable requirements as a CRD (regardless of whether the plan has treated the distribution as a CRD) by reporting the distribution on the individual’s federal income tax return and on Form 8915-E. (Eligible distributions and refunds from the 2020 Disaster Retirement Plan).
Qualified individuals designating amounts as CRD have two options to include the taxable portion of the CRD in their income: (1) include the taxable portion of the distribution in pro rata income over a 3 year period; or (2) choose not to be included in the taxable income over 3 years and to include the full amount of the taxable part of the CRD in the year of the distribution. An election cannot be made or changed after the timely filing of the individual’s federal income tax return (including any extensions) for the distribution year, and all CRDs received in a tax year must be treated consistently (either all distributions must be included in income over a 3 year period or all distributions must be included in current year income).
If an eligible individual elects to contribute part of the CRD within the 3-year period beginning the day after the date of receipt of the CRD, the reporting requirements and applicable tax consequences vary depending on whether the individual uses the CRD. ‘one year or 3 years. – method of inclusion of the year in respect of the CRD and whether the contribution is made before or after the individual has filed his federal income tax return for the applicable tax year. Special rules also apply to qualifying individuals who use the three-year income inclusion method in respect of a CRD if the individual dies before the full taxable amount of the CRD has been included in their gross income. .
 As we noted in a recent Blog, according to previous IRS guidelines, a “qualified person” did not include an individual who suffered negative financial consequences attributable to a spouse’s loss of income due to a coronavirus-related quarantine, a leave, layoff, reduction of hours, inability to work due to lack of child care, or the closure of a spouse’s business or reduced business hours of a spouse. The definition of qualified person, extended by Opinion 2020-50, now includes these people.