On June 19, 2020, the IRS released Notice 2020-50, which provides additional guidance and relief for retirement plan participants taking coronavirus-related distributions and loans under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Under the CARES Act, “qualified individuals” may take coronavirus-related distributions of up to $100,000 from their eligible retirement plans without being subject to the 10% additional tax on early distributions. In addition, a coronavirus-related distribution can be included in income ratably over the three-year period commencing with the year of distribution and the individual taking the distribution has three years to repay the distribution to the plan, or roll it over to an Individual Retirement Account (“IRA”) or other qualified retirement plan, with the effect of reversing the income tax consequences of the distribution. In addition, the CARES Act allows plans to suspend loan repayments due from March 27, 2020 through December 31, 2020 and further allows for an increase in the dollar amount on loans made between March 27, 2020 and September 22, 2020 from $50,000 to $100,000. Notice 2020-50 expands the definition of qualified individuals under the Act and provides additional, clarifying guidance regarding coronavirus-related distributions and loans.
Expansion of the Definition of “Qualified Individual”
Under the original language of the CARES Act, a qualified individual included the following persons:
1. A Plan participant (or the participant’s spouse or tax dependent) who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention, or
2. A Plan participant who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.
Notice 2020-50 expands paragraph 2 of this definition to include a spouse or member of the participant’s household suffering from adverse financial consequences. Moreover, adverse financial consequences are expanded to include having pay or self-employment income reduced due to COVID-19 or having a job offer rescinded or start date of a job delayed due to COVID-19.
Additional Guidance
Notice 2020-50 further clarifies that employers have the option to choose whether to implement coronavirus related distributions and loans. However, the guidance further states that qualified individuals can claim the tax benefits of coronavirus-related distribution rules even if their participating plan rules are not changed. Plan administrators may rely on an employee’s certification that the employee satisfies one of the above criteria in determining whether that participant is a qualified individual and provides a sample certification for reference.
The Notice provides that an eligible retirement plan must report the payment of a coronavirus-related distribution to a qualified individual on Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. This reporting is required even if the qualified individual recontributes the coronavirus-related distribution to the same eligible retirement plan in the same year. The Notice further clarifies that a qualified individual receiving a coronavirus-related distribution is entitled to favorable tax treatment by reporting the distribution on the individual’s income tax return for 2020 and on Form 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments. Form 8915-E is expected to be available before the end of 2020. As set forth in the Notice, there are two methods for a qualified individual to include the taxable portion of a coronavirus-related distribution in income. First, a qualified individual who receives a coronavirus-related distribution is permitted to include the taxable portion of the distribution in income ratably over a 3-year period that begins in the year of the distribution. Alternatively, a qualified individual is permitted to elect out of the 3-year ratable income inclusion and include the entire amount of the taxable portion of the distribution in income in the year of the distribution. This election cannot be made or changed after the timely filing of the individual’s federal income tax return (including extensions) for the year of the distribution. All coronavirus-related distributions received in a taxable year must be treated consistently, i.e. either all distributions must be included in income over a 3-year period or all distributions must be included in income in the current year. If a qualified individual includes a coronavirus-related distribution in gross income in the year of the distribution and recontributes the distribution to an eligible retirement plan after the timely filing of the individual’s federal income tax return for the year of the distribution, i.e. the due date including extensions, the individual will need to file an amended federal income tax return for the year of distribution. The qualified individual will also need to file a revised Form 8915-E (with his or her amended federal income tax return).
Finally, Notice 2020-50 provides employers a safe harbor for implementing the suspension of loan repayments otherwise due through the end of 2020, but notes that there may be other reasonable ways to administer these rules.