Skip to main content
Article | Insider

IRS issues guidance on coronavirus-related distributions and loans

Benefits Administration and Outsourcing|Executive Compensation|Health and Benefits
COVID 19 Coronavirus

By Gary Chase , Stephen Douglas and Maria Sarli | July 21, 2020

The notice expands the definition of who qualifies for coronavirus-related distributions and loans, and addresses tax reporting questions.

The IRS has issued Notice 2020-50, which provides guidance relating to the special distribution and loan provisions in the CARES Act. The notice expands the definition of who qualifies for coronavirus-related distributions and loans, provides that a coronavirus-related distribution will be treated like a hardship distribution for purposes of suspending executives’ deferrals to a nonqualified plan, and clarifies certain areas such as the one-year loan suspension provision. The notice also addresses many administrative and tax reporting questions in connection with the coronavirus-related distributions and loans.

Background

Under the Cares Act, “qualified individuals” are eligible for favorable tax treatment with respect to 2020 coronavirus-related distributions from eligible retirement plans. A coronavirus-related distribution is not subject to the 10% additional tax required under the Internal Revenue Code, generally can be included in income over a three-year period, and in most cases can be recontributed to an eligible retirement plan within a three-year period to avoid income taxation. The Cares Act also increases the allowable plan loan amount for loans made from March 27, 2020, to September 22, 2020, to “qualified individuals” and permits a suspension of payments for plan loans that would otherwise be due from March 27, 2020, through December 31, 2020, by “qualified individuals.”

Definition of a qualified individual

The CARES Act generally allows distributions and loan relief to an individual who meets one of the following criteria:

  1. Was diagnosed with COVID-19, or whose spouse or other dependent was diagnosed with COVID-19, by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act)
  2. Experiences an adverse financial consequence as a result of being quarantined; being furloughed, laid off or having hours reduced; being unable to work due to a lack of childcare; or closing or reducing the hours of a business owned or operated by the individual
  3. Satisfies other criteria as determined by the secretary of the Treasury

Notice 2020-50 expands the definition of a “qualified individual” in item (2) above to an individual who has his or her pay (or self-employment income) reduced due to COVID-19 or has a job offer rescinded or start date for a job delayed due to COVID-19. The notice also provides that an individual qualifies if the adverse financial consequences noted in item (2) are experienced by the individual’s spouse or a member of the individual’s household.

Coronavirus-related distributions

Qualified individual can designate distributions as coronavirus-related. A qualified individual is permitted to designate a distribution as coronavirus-related without regard to whether the plan treated the distribution as such. This provision ensures that a qualified individual is able to receive favorable tax treatment for a 2020 distribution that he or she receives regardless of whether the plan administrator is aware that a participant is a qualified individual or the employer elects for the plan to specifically offer coronavirus-related distributions.

Distribution by qualified pension plans. The CARES Act does not change the rules for when plan distributions are permitted to be made from qualified “pension plans” (i.e., defined benefit plans and money purchase defined contribution plans). For example, a pension plan is not permitted to make a distribution before an otherwise permitted distributable event merely because the distribution, if made, would qualify as a coronavirus-related distribution. Further, a pension plan is not permitted to make a distribution under a distribution form that is not a qualified joint and survivor annuity without spousal consent merely because the distribution, if made, could be treated as a coronavirus-related distribution.

By contrast, coronavirus-related distributions from qualified defined contribution plans of 401(k) or 403(b) deferrals as well as match and nonelective contributions can be made irrespective of whether there is a distributable event.

Plan treatment of distribution. An employer may choose whether, and to what extent, to treat plan distributions as coronavirus-related distributions (as well as whether, and to what extent, to apply the coronavirus-related plan loan rules); however, a plan must treat similar types of distributions consistently.

Certifications. The administrator of an eligible retirement plan may rely on an individual’s certification that he or she is a qualified individual in determining whether a distribution is a coronavirus-related distribution, unless the administrator has actual knowledge to the contrary. The notice clarifies that the "actual knowledge" standard does not mean that the plan administrator has an obligation to inquire whether an individual satisfies the conditions to be a qualified individual. Rather, it means that the administrator must already possess the information.

Individual tax reporting. A qualified individual receiving a coronavirus-related distribution is entitled to favorable tax treatment regarding the distribution by reporting the distribution on his or her federal income tax return for 2020 and on the new Form 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments (or if there is no federal income tax return for 2020, by filing just Form 8915-E). Qualified individuals will also use Form 8915-E to report any recontribution made during the taxable year and to determine the amount of the coronavirus-related distribution includible in income for the taxable year.

Plan tax reporting. An eligible retirement plan must report the payment of a coronavirus-related distribution to a qualified individual on Form 1099-R. This reporting is required even if the qualified individual recontributes the coronavirus-related distribution to the same eligible retirement plan in the same year. If a payor is treating a payment as a coronavirus-related distribution and no other appropriate code applies, the payor is permitted to enter in box 7 of Form 1099-R either distribution code 2 (early distribution, exception applies) or distribution code 1 (early distribution, no known exception).

Plan not required to accept recontribution. A recontribution of a coronavirus-related distribution is treated like a rollover contribution. Eligible retirement plans generally are not required to accept rollover contributions. So if a plan does not accept any rollover contributions, the plan would not be required to change its terms to accept recontributions. However, for a plan that does accept rollover contributions, the notice is not clear on whether it must accept repayments of coronavirus-related distributions.

Application of the CARES Act to plan loans

CARES Act loan provision optional. An employer may choose whether, and to what extent, to apply CARES Act plan loan rules regarding increased plan limits and/or suspension of loan repayments, regardless of how coronavirus-related distributions are treated.

Suspension of loan repayments and extension of loan term. The CARES Act provides that loan payments otherwise due from March 27 through December 31, 2020, may be delayed for one year and any subsequent repayments will be adjusted to reflect the delayed payments and any interest accruing during that period. Unfortunately, the law is not clear regarding how the suspension and reamortization process should work administratively. The notice provides a relatively simple safe harbor approach, while acknowledging that other approaches may also be reasonable legal interpretations. Under this safe harbor, a qualified individual’s obligation to repay a plan loan is suspended under the plan for any period between March 27, 2020, and December 31, 2020 (i.e., the suspension period). The loan repayments must resume after the end of the suspension period, and the term of the loan may be extended by up to one year from the date the loan was originally due to be repaid. Interest accruing during the suspension period must be added to the remaining principal of the loan. The loan is then reamortized and repaid in substantially level installments over the remaining period of the loan — that is, five years from the date of the loan (assuming that the loan is not a principal residence loan) plus up to one year from the date the loan was originally due to be repaid. The notice also permits the use of other approaches, though for many employers the safe harbor will be the simplest to implement and administer.

Permitted cancellation of deferral election

Cancellation of election. Under the Internal Revenue Code, a nonqualified deferred compensation plan subject to section 409A may cancel a participant’s deferral election due to an unforeseeable emergency or a hardship distribution. If a participant receives a distribution from an eligible retirement plan that constitutes a coronavirus-related distribution, that distribution will be considered such a hardship distribution, permitting cancellation of the deferral election. The notice points out, however, that, in this event, the deferral election under the nonqualified deferred compensation plan must be cancelled, not merely postponed or delayed.

Download
Title File Type File Size
Insider July 2020 PDF .3 MB
Authors

Director, Retirement and Executive Compensation

Senior Director, Retirement and Executive Compensation

U.S. Retirement Resource Actuary

Contact Us