IRS Issues New Relief and Guidance for CARES Act Retirement Plan Provisions

On June 19, 2020, the Internal Revenue Service (IRS) issued Notice 2020-50 which helps individuals affected by COVID-19 take advantage of CARES Act provisions allowing access to retirement accounts via distributions and loans. The Notice broadens the definition of a Qualified Individual for purposes of Coronavirus Related Distributions (CRDs) and enhanced loan provisions.

The definition of a Qualified Individual was previously limited to the following:

• Participant has been diagnosed with the virus (CDC-approved test);
• Participant’s spouse or dependent has been diagnosed with the virus; or
• Participant has suffered financially due to the virus for one of the following reasons:
  • Participant was laid off, furloughed, had work hours reduced, or was quarantined;
  • Participant cannot work due to unavailability of childcare; or
  • Participant’s business closed or reduced hours of operation.

Notice 2020-50 effectively expands the definition of a Qualified Individual to now include individuals experiencing financial challenges caused by COVID-19. Specifically, the Notice states that a Qualified Individual may also include:

• Participants experiencing a reduction in pay;
• Participants experiencing a reduction in self-employment income; or
• Participants who have had a job offer rescinded, or job start date delayed.

Notice 2020-50 also allows participants to be considered a Qualified Individual if a spouse or member of their household has suffered financially because of COVID-19. A member of the household can include family members, roommates, boarders, or significant others.

Additionally, the IRS clarified requirements around verification of the individual’s certification, deeming that there is no need for the plan sponsor to inquire or investigate the claim unless the employer has specific knowledge to the contrary. Relying on the individual’s certifications will allow the plan to remain qualified based on the certification, but if the IRS inquires with the individual participant, that participant will need to be able to provide verification to receive the favorable tax treatment.

A qualified plan is not required to offer the CRDs, the maximum allowable loans, or delayed loan payments offered under the CARES Act. Distributions taken and portions paid back will be reportable on Form 8915-E, which has yet to be released. Individuals taking these distributions should plan to include the form with their tax filing.

Further, CRDs will be taxable either in the year of the distribution or ratably over the 3-year period (2020 to 2022). Once this election is made, it is irrevocable. If you take a CRD, you have the option to pay it back over the same 3-year period. For amounts paid back that have already been treated as taxable income, the individual will need to amend the prior years’ tax returns for each year affected. Plans do not have to accept these distributions to be paid back as the repayment will be treated as a rollover, and not all plans accept rollover contributions.

Beyond the expansion of the definition of a Qualified Individual, the loan provisions have not changed. The maximum loan amount is limited to the lesser of $100,000 or 100% of a participant’s vested account balance. The loans need to be taken before September 23, 2020. The same loan suspension and extension rules apply. Any loan payments due from March 27, 2020, to December 31, 2020, can be suspended until January 1, 2021, and the loan can be extended one year beyond the normal five-year payback period.

Many nuances in these rules need to be considered to assure favorable tax treatment for CRDs and to avoid prohibited transactions with the expanded loan provisions. Aprio’s experts are ready to answer your questions and guide you through the new regulations. Reach out today.