Current Federal Tax Developments

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Notice Provides Details on CARES Act Retirement Plan Provisions

Ed Zollars, CPA

Guidance has been issued on various employee benefit plan relief provisions found in the CARES Act in Notice 2020-50.[1]

Coronavirus-Related Distributions from Retirement Plans

CARES Act §2202(a) provides specific relief to beneficiaries of retirement plans for a coronavirus-related distribution.  Specifically, the Notice describes this relief in Section 1 of the Notice for such distributions as follows:

The section provides an exception to the 10% additional tax under § 72(t) of the Code (including the 25% additional tax under § 72(t)(6) for certain distributions from SIMPLE IRAs), allows the distribution to be included in income ratably over 3 years, and provides that the distribution will be treated as though it were paid in a direct rollover to an eligible retirement plan if the distribution is eligible for tax-free rollover treatment and is recontributed to an eligible retirement plan within the 3-year period beginning on the day after the date on which the distribution was received.[2]

To be eligible for such relief, a person must be a qualified individual.  The law specifically describes the following categories of qualified individuals to include an individual:

  • Who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (referred to collectively in this notice as 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);

  • Whose spouse or dependent (as defined in section 152 of the Code) is 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); or

  • Who experiences adverse financial consequences as a result of:

    • the individual being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19;

    • the individual being unable to work due to lack of childcare due to COVID-19; or

    • closing or reducing hours of a business owned or operated by the individual due to COVID-19.[3]

As well, the CARES Act at §2202(a)(4)(A)(ii)(III) allows the IRS to provide for other factors that would make the participant a qualified individual eligible for coronavirus-related distributions.  In Notice 2020-50 the IRS provides that a qualified individual also includes an individual who experiences adverse financial consequences as a result of:

  • The individual having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19;

  • The individual’s spouse or a member of the individual’s household being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; or

  • Closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.[4]

A member of the taxpayer’s household is defined as “someone who shares the individual’s principal residence.”[5]

The relief relates to a coronavirus-related distribution.  The Notice describes the law provision as follows:

Section 2202(a)(4)(A) of the CARES Act defines a coronavirus-related distribution as any distribution from an eligible retirement plan made on or after January 1, 2020, and before December 31, 2020, to a qualified individual. Section 2202(a)(2) of the CARES Act limits the amount of aggregate distributions from all eligible retirement plans that can be treated as coronavirus-related distributions to no more than $100,000.[6]

The Notice provides that it is the individual and not the plan that ultimately designates a distribution as a corona-virus related distribution, so long as it meets the necessary requirements.  The Notice continues:

This designation is permitted to be made with respect to any distribution to a qualified individual that would meet the requirements of a coronavirus-related distribution without regard to whether the plan treated the distribution as a coronavirus-related distribution. Thus, periodic payments and distributions that would have been required minimum distributions but for section 2203 of the CARES Act, received by a qualified individual from an eligible retirement plan on or after January 1, 2020, and before December 31, 2020, are permitted to be treated as coronavirus-related distributions and, therefore, permitted to be included in income ratably over 3 years. Similarly, any distribution received by a qualified individual as a beneficiary can be treated as a coronavirus-related distribution. In addition, a reduction or offset of a qualified individual’s account balance in order to repay a plan loan, as described in Q&A-9(b) of § 1.402(c)-2, including a qualified plan loan offset, is permitted to be treated as a coronavirus-related distribution.[7]

However, the employer retirement plan is allowed to (but not required to) treat a distribution as a coronavirus-related distribution.  The Notice provides:

As explained in section 2.C of this notice, an employer retirement plan also is permitted, but not required, to treat a plan distribution meeting the conditions described in this section 1.C as a coronavirus-related distribution. It is possible that a qualified individual’s designation of a coronavirus-related distribution may be different from the employer retirement plan’s treatment of the distribution. This different treatment could occur, for example, if a qualified individual has more than one plan distribution that meets the requirements of a coronavirus-related distribution, but one of those distributions occurs before the effective date of the plan amendment providing for coronavirus-related distributions. The different treatment could also occur, for example, if a qualified individual has distributions from more than one eligible retirement plan, and the aggregate amount of those distributions exceeds $100,000.[8]

However, the Notice provides that certain distributions, described in Q&A 4 of Reg. §1.402(c)-2, are not permitted to be treated as coronavirus-related distributions.  This would include:

  • Corrective distributions of elective deferrals and employee contributions that are returned to the employee (together with the income allocable thereto) in order to comply with the § 415 limitations,

  • Excess elective deferrals under § 402(g),

  • Excess contributions under § 401(k),

  • 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).[9]

Once an individual is found to be a qualified individual to receive a coronavirus-related distribution, there is no limit on what the distribution can be used for.  The Notice provides:

The definition of a coronavirus-related distribution under section 2202(a)(4) of the CARES Act does not limit these distributions to amounts withdrawn solely to meet a need arising from COVID-19. Thus, for example, for an individual who is a qualified individual as a result of experiencing adverse financial consequences as described above, coronavirus-related distributions are permitted without regard to the qualified individual’s need for funds, and the amount of the distribution is not required to correspond to the extent of the adverse financial consequences experienced by the qualified individual.[10]

The Notice also explains that some, but not all, coronavirus-related distributions are eligible for a special 3-year rollover treatment.  It begins by explaining that, generally, a distribution must be of a type otherwise eligible for rollover treatment, providing:

…[O]nly a coronavirus-related distribution that is eligible for tax-free rollover treatment under § 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16) is permitted to be recontributed to an eligible retirement plan, and that recontribution will be treated as having been made in a trustee-to-trustee transfer to that eligible retirement plan.[11]

Specifically, while a distribution made to the beneficiary of an inherited IRA or retirement account can qualify for the 3-year inclusion rule for coronavirus-related distributions, “[a]ny coronavirus-related distribution (whether from an employer retirement plan or an IRA) paid to a qualified individual as a beneficiary of an employee or IRA owner (other than the surviving spouse of the employee or IRA owner) cannot be recontributed.”[12]

Hardship distributions are not normally eligible for rollover treatment, but the Notice provides:

In general, a distribution from an employer retirement plan made on account of hardship is not an eligible rollover distribution. However, if the distribution satisfies the requirements under section 1.C of this notice, then, except as otherwise provided in section 6 of this notice (relating to nonqualified deferred compensation plans), the distribution is not treated as made on account of hardship for purposes of this notice and, thus, any portion of the distribution is permitted to be recontributed to an eligible retirement plan.[13]

Guidance for Individuals Receiving Coronavirus-Related Distributions

The Notice provides that individuals entitled to tax-favored treatment for coronavirus-related distributions will report the distribution on Form 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments, a form expected to be available by the end of 2020. The same form will be used to report any recontribution made during a tax year and to determine the amount of the coronavirus-related distribution includible in income for the taxable year.

An individual makes an election to treat a distribution that meets the requirements to be a coronavirus-related distribution as such on his/her individual return, subject to the cap of $100,000 for the individual.[14]

Example 1-Notice 2020-50, Section 4.A.

If a qualified individual receives a distribution of $50,000 in August of 2020 and a distribution of $75,000 in September of 2020 and both distributions satisfy the definition of a coronavirus-related distribution, only $100,000 of the $125,000 received by the qualified individual can be treated as a coronavirus-related distribution. Thus, the individual can only treat $100,000 of the August and September distributions as coronavirus-related distributions on the individual’s 2020 federal income tax return. Assuming no § 72(t)(2) exception applies, the remaining $25,000 of the distribution is an early distribution that is subject to the 10% additional tax. This amount must be included on the individual’s 2020 federal income tax return and will not be eligible for 3-year recontribution to an eligible retirement plan.

Example 2 Notice 2020-50, Section 4.A.

A section 401(k) plan distributes $35,000 to a qualified individual on December 1, 2020. The qualified individual also receives a distribution from the individual’s IRA on December 1, 2020, of $15,000. The individual is permitted to treat both the $35,000 from the plan and the $15,000 from the IRA as coronavirus-related distributions on the individual’s 2020 federal income tax return.

The notice provides an individual with a choice of two tax treatments for a qualified coronavirus-related distribution:

  • 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.[15]

The election cannot be made or changed after the timely filing of the individual’s federal income tax return (including extensions) for the year the distribution is received.  All coronavirus-related distributions received during the year are required to be treated in the same fashion—that is, the election is an all or nothing election with regard to the distributions for the year.[16]

Example Notice 2020-50 Section 4.B.

Taxpayer A receives a $30,000 distribution from his or her IRA on October 1, 2020. Taxpayer A is a qualified individual and elects to treat the distribution as a coronavirus-related distribution. Taxpayer A uses the 3-year ratable income inclusion for the $30,000 distribution. Taxpayer A should include $10,000 in income with respect to the coronavirus-related distribution on each of the individual’s 2020, 2021, and 2022 federal income tax returns.

Recontributions are more complicated, since the 3-year period to recontribute extends well beyond the due date for the tax return for the year of the distribution.  As well, the taxpayer may have opted to either include the entire amount in income in the first year, or spread the taxable amount of the distribution over three years.

Regardless of which election is made for income inclusion, the taxpayer can make a recontribution of an otherwise-qualified rollover distribution:

If a coronavirus-related distribution is eligible for tax-free rollover treatment (taking into account section 1.D of this notice), a qualified individual is permitted, at any time in the 3-year period beginning the day after the date of a coronavirusrelated distribution, to recontribute any portion of the distribution, but not an amount in excess of the amount of the distribution, to an eligible retirement plan. A recontribution of a coronavirus-related distribution will not be treated as a rollover contribution for purposes of the one-rollover-per-year limitation under § 408(d)(3)(B).[17]

The Notice first discusses the tax treatment for an individual that had not chosen to include the original distribution in income over three years.  Not unexpectedly, the individual will need to include the amount of the distribution in income for the year of distribution unless the recontribution is made prior to the timely filing of the individual’s tax return for the year of the distribution. 

The Notice then describes what will happen once the amount is recontributed:

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 (that is, after the due date, including extensions), the individual will need to file an amended federal income tax return for the year of the distribution. The qualified individual will need to file a revised Form 8915-E (with his or her amended federal income tax return) to report the amount of the recontribution and should reduce his or her gross income by the amount of the recontribution, but not in an amount exceeding the amount of the coronavirus-related distribution.[18]

Example 1 Notice 2020-50 Section 4.D.

Taxpayer B receives a $45,000 distribution from a § 403(b) plan on November 1, 2020. Taxpayer B is a qualified individual and treats the distribution as a coronavirus-related distribution. Taxpayer B receives no other coronavirus-related distribution from any eligible retirement plan. Taxpayer B recontributes $45,000 to an IRA on March 31, 2021. Taxpayer B reports the recontribution on Form 8915-E and files the 2020 federal income tax return on April 10, 2021. For Taxpayer B, no portion of the coronavirus-related distribution is includible as income for the 2020 tax year.

Example 2 Notice 2020-50 Section 4.D.

The facts are the same as in Example 1 of this section 4.D, except that Taxpayer B timely requests an extension of time to file the 2020 federal income tax return and makes a recontribution on August 2, 2021, before filing the 2020 federal income tax return. Taxpayer B files the 2020 federal income tax return on August 10, 2021. As in Example 1, no portion of the coronavirus-related distribution is includible in income for the 2020 tax year because Taxpayer B made the recontribution before the timely filing of the 2020 federal income tax return.

Example 3 Notice 2020-50 Section 4.D.

Taxpayer C receives a $15,000 distribution from a governmental § 457(b) plan on March 30, 2020. Taxpayer C is a qualified individual and treats the distribution as a coronavirus-related distribution. Taxpayer C elects out of the 3-year ratable income inclusion on Form 8915-E and includes the entire $15,000 in gross income for the 2020 taxable year. On December 31, 2022, Taxpayer C recontributes $15,000 to the § 457(b) plan. Taxpayer C will need to file an amended federal income tax return for the 2020 tax year to report the amount of the recontribution and reduce the gross income by $15,000 with respect to the coronavirus-related distribution included on the 2020 original federal income tax return.

For those electing a 3-year inclusion in income, only a portion of the distribution may have been subject to tax when the recontribution is made.  Initially the recontribution reduces the amount included in the next return due to be filed as follows:

As explained above, a qualified individual is permitted to include a coronavirus-related distribution in income ratably over a 3-year period. If a qualified individual includes a coronavirus-related distribution ratably over a 3- year period and the individual recontributes any portion of the coronavirus-related distribution to an eligible retirement plan at any date before the timely filing of the individual’s federal income tax return (that is, by the due date, including extensions) for a tax year in the 3-year period, the amount of the recontribution will reduce the ratable portion of the coronavirus-related distribution that is includible in gross income for that tax year. See section 4.F of this notice for recontributions that affect income inclusion in other tax years.

Example 1 Notice 2020-50 Section 4.E.

Taxpayer D receives $75,000 from a section 401(k) plan on December 1, 2020. Taxpayer D is a qualified individual and treats the $75,000 distribution as a coronavirus-related distribution. Taxpayer D uses the 3-year ratable income inclusion method for the distribution. Taxpayer D makes one recontribution of $25,000 to the section 401(k) plan on April 10, 2022. Taxpayer D files the 2021 federal income tax return on April 15, 2022. Without the recontribution, Taxpayer D should include $25,000 in income with respect to the coronavirus-related distribution on each of D’s 2020, 2021, and 2022 federal income tax returns. However, as a result of the recontribution to the section 401(k) plan, Taxpayer D should include $25,000 in income with respect to the coronavirus-related distribution on the 2020 federal income tax return, $0 in income with respect to the coronavirus-related distribution on the 2021 federal income tax return, and $25,000 in income with respect to the coronavirus-related distribution on the 2022 federal income tax return.

Example 2 Notice 2020-50 Section 4.E.

The facts are the same as in Example 1 of this section 4.E, except that Taxpayer D recontributes $25,000 to the section 401(k) plan on August 10, 2022. Taxpayer D files the 2021 federal income tax return on April 15, 2022, and does not request an extension of time to file that federal income tax return. As a result of the recontribution to the section 401(k) plan, Taxpayer D should include $25,000 in income with respect to the coronavirus-related distribution on the 2020 federal income tax return, $25,000 in income with respect to the coronavirus-related distribution on the 2021 federal income tax return, and $0 in income with respect to the coronavirus-related distribution on the 2022 federal income tax return.

If the amount of the recontribution exceeds the amount to be included in the next return to be filed, the Notice provides for a carryback or carryforward of the excess:

If a qualified individual using the 3-year ratable income inclusion method recontributes an amount of a coronavirus-related distribution for a tax year in the 3-year period that exceeds the amount that is otherwise includible in gross income for that tax year, as described in section 4.E of this notice, the excess amount of the recontribution is permitted to be carried forward to reduce the amount of the coronavirus-related distribution that is includible in gross income in the next tax year in the 3-year period. Alternatively, the qualified individual is permitted to carry back the excess amount of the recontribution to a prior taxable year or years in which the individual included income attributable to a coronavirus-related distribution. The individual will need to file an amended federal income tax return for the prior taxable year or years to report the amount of the recontribution on Form 8915-E and reduce his or her gross income by the excess amount of the recontribution. [19]

Example Notice 2020-50 Section 4.F.

Taxpayer E receives a distribution of $90,000 from his or her IRA on November 15, 2020. Taxpayer E is a qualified individual and treats the distribution as a coronavirus-related distribution. Taxpayer E ratably includes the $90,000 distribution in income over a 3-year period. Without any recontribution, Taxpayer E will include $30,000 in income with respect to the coronavirus-related distribution on each of the 2020, 2021, and 2022 federal income tax returns. Taxpayer E includes $30,000 in income with respect to the coronavirus-related distribution on the 2020 federal income tax return. Taxpayer E then recontributes $40,000 to an IRA on November 10, 2021 (and makes no other recontribution in the 3-year period). Taxpayer E is permitted to do either of the following:

  • Option 1. Taxpayer E includes $0 in income with respect to the coronavirus-related distribution on the 2021 federal income tax return. Taxpayer E carries forward the excess recontribution of $10,000 to 2022 and includes $20,000 in income with respect to the coronavirus-related distribution on E’s 2022 federal income tax return.

  • Option 2. Taxpayer E includes $0 in income with respect to the coronavirus-related distribution on the 2021 tax return and $30,000 in income on the 2022 federal income tax return. Taxpayer E also files an amended federal income tax return for 2020 to reduce the amount included in income as a result of the coronavirus-related distribution to $20,000 (that is, the $30,000 original amount includible in income for 2020 minus the remaining $10,000 recontribution that is not offset on either the 2021 or 2022 federal tax return).

It is possible that the recipient who elected a 3-year inclusion in income may die prior to the end of the three-year period.  In that case, the Notice provides:

If a qualified individual dies before the full taxable amount of the coronavirus-related distribution has been included in gross income, then the remainder must be included in gross income for the taxable year that includes the individual’s death.

The IRS also addresses the impact of taking a coronavirus-related distribution for a participant who is currently receiving substantially equal periodic payments to avoid the imposition of the 10% additional tax for distributions received prior to age 59 ½.  The Notice provides the following to avoid disruption of the exception:

In the case of an individual receiving substantially equal periodic payments from an eligible retirement plan, the receipt of a coronavirus-related distribution from that plan will not be treated as a change in substantially equal payments as described in § 72(t)(4) merely because of the coronavirus-related distribution.[20]

Employer Retirement Plans Making Coronavirus-Related Distributions

The Notice points out that under CARES Act §2202(a)(6) “a distribution designated as a coronavirus-related distribution by an employer retirement plan is treated as meeting the distribution restrictions for qualified cash or deferred arrangements under § 401(k)(2)(B)(i), custodial accounts under § 403(b)(7)(A)(i), annuity contracts under § 403(b)(11), governmental deferred compensation plans under § 457(d)(1)(A), and the Thrift Savings Plan under 5 U.S.C. 8433(h)(1).”[21]

The Notice goes on to explain this special exception to the distribution requirements for such plans as follows:

[F]or example, an employer may expand the distribution options under its plan to allow an amount attributable to an elective, qualified nonelective, qualified matching, or safe harbor contribution under a qualified cash or deferred arrangement to be distributed as a coronavirus-related distribution even though it is distributed before an otherwise permitted distributable event, such as severance from employment, disability, or attainment of age 59½.[22]

However, the CARES Act does not otherwise change such distribution rules for these plans:

Except as described above, section 2202 of the CARES Act does not change the rules for when plan distributions are permitted to be made from employer retirement plans. Thus, for example, a qualified plan that is a pension plan (such as a money purchase 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.[23]

The requirements to issue a §402(f) notice, offer a direct rollover or the mandatory withholding of 20% of the distribution do not apply to a qualified plan’s coronavirus-related distributions:

…[T]he plan is not required to offer the qualified individual a direct rollover with respect to the distribution. In addition, the plan administrator is not required to provide a § 402(f) notice. Finally, the plan administrator or payor of the coronavirus-related distribution is not required to withhold an amount equal to 20% of the distribution, as is usually required under § 3405(c)(1). However, a coronavirus-related distribution is subject to the voluntary withholding requirements of § 3405(b) and § 35.3405-1T.[24]

The employer is permitted significant latitude with the plan-level designation of coronavirus-related distributions.  The Notice provides:

An employer is permitted to choose whether, and to what extent, to treat distributions under its plans as coronavirus-related distributions (as well as whether, and to what extent, to apply coronavirus-related plan loan rules described in section 5 of this notice). Thus, for example, an employer may choose to provide for coronavirus-related distributions but choose not to change its plan loan provisions or loan repayment schedules. Further, the employer (or plan administrator) is permitted to develop any reasonable procedures for identifying which distributions are treated as coronavirus-related distributions under its retirement plans.[25]

Nevertheless, the plan must be consistent in its treatments.  The Notice provides:

However, if, under an employer retirement plan, any distribution of an amount subject to § 401(k)(2)(B)(i), 403(b)(7)(A)(i), 403(b)(11) or 457(d)(1)(A) is treated as a coronavirus-related distribution, the plan must be consistent in its treatment of similar distributions. Accordingly, the amount of the distribution must be taken into account in determining the $100,000 limit on coronavirus-related distributions made under all the retirement plans maintained by the employer. [26]

As well, as noted in the section on individuals’ treatments of coronavirus-related distributions, the plan’s designation does not bind the individual if the distribution otherwise meets the requirement of being a coronavirus-related distribution:

Even if, under a plan, a distribution is not treated as coronavirus-related, a qualified individual may treat a distribution that meets the requirements of section 1.C of this notice as a coronavirus-related distribution on the individual's federal income tax return.[27]

While the employer cannot determine how much, if any, an employee has taken as coronavirus-related distributions from other plans, the employer is required to cap coronavirus-related distributions from the plans it does sponsor on a per employee basis:

The total amount of distributions treated by an employer as coronavirusrelated distributions under all its retirement plans with respect to a qualified individual is not permitted to exceed $100,000. For purposes of this rule, the term “employer” means the employer maintaining the plan and those employers required to be aggregated with the employer under § 414(b), (c), (m), or (o). However, a plan will not fail to satisfy any requirement under the Code merely because a qualified individual’s total coronavirus-related distributions exceed $100,000 taking into account distributions from IRAs or other eligible retirement plans maintained by unrelated employers.[28]

A plan is allowed to accept an employee’s certification that the individual meets the conditions to be a qualified individual unless the administrator has actual knowledge to the contrary.  An administrator does not have to make an inquiry into whether the individual satisfies the conditions, but rather is limited to cases where the administrator is already aware the individual does not qualify.[29]

The Notice provides the following sample certification an administrator can have an employee complete stating he/she is a qualified individual:

Name: _______________________ (and other identifying information requested by the employer for administrative purposes).

I certify that I meet at least one of the following conditions: (1) I was diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (referred to collectively as 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) my spouse or my 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); or (3) I have experienced adverse financial consequences because: (i) I, my spouse, or a member of my household was quarantined, furloughed or laid off, or had work hours reduced due to COVID-19; (ii) I, my spouse, or a member of my household was unable to work due to lack of childcare due to COVID-19; (iii) a business owned or operated by me, my spouse, or a member of my household closed or reduced hours due to COVID-19; or (iv) I, my spouse, or a member of my household had a reduction in pay (or self-employment income) due to COVID-19 or had a job offer rescinded or start date for a job delayed due to COVID-19.

Signature: ______________________

The fact that a plan may have treated a distribution as a coronavirus-related distribution does not mean the individual may treat the distribution in that manner.  Rather, the individual is responsible for determining if he/she meets the requirements for a coronavirus-related distribution.[30]

Finally, the Notice provides information on the ability to operate the plan as if it had been amended to implement CARES Act provisions, so long as an actual amendment is made by specified dates:

An employer retirement plan will not be treated as failing to operate in accordance with its terms merely because the plan implements the provisions of section 2202 of the CARES Act if the employer amends its plan by the dates described in this paragraph. For employer retirement plans other than governmental plans under § 414(d) of the Code, the date by which any plan amendment to reflect the CARES Act is required to be made is the last day of the first plan year beginning on or after January 1, 2022. For governmental plans under § 414(d) of the Code, the date by which any plan amendment to reflect the CARES Act is required to be made is the last day of the first plan year beginning on or after January 1, 2024. Pursuant to the authority of the Secretary under section 2202(c)(2) of the CARES Act, these dates may be extended in future guidance.[31]

Plans Making or Accepting Recontributions of Coronavirus-Related Distributions

Tax reporting for plans (including IRAs) is covered in Section 3 of the notice.

The plans will report distributions on Forms 1099-R as follows:

An eligible retirement plan must report the payment of a coronavirusrelated 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. If a payor is treating the payment as a coronavirus-related distribution and no other appropriate code applies, the payor is permitted to use distribution code 2 (early distribution, exception applies) in box 7 of Form 1099-R. However, a payor also is permitted to use distribution code 1 (early distribution, no known exception) in box 7 of Form 1099-R.[32]

For plans that decide to accept recontributions, the Notice provides the following guidance:

In general, a qualified individual who receives a coronavirus-related distribution that is eligible for tax-free rollover treatment is permitted to recontribute, at any time in a 3-year period, any portion of the distribution to an eligible retirement plan that is permitted to accept eligible rollover contributions. The relief in Q&A-14 of § 1.401(a)(31)-1 applies to an employer retirement plan accepting recontributions of coronavirus-related distributions. In order to obtain the relief described in Q&A-14 of § 1.401(a)(31)-1, a plan administrator accepting the recontribution of a coronavirus-related distribution must reasonably conclude that the recontribution is eligible for direct rollover treatment under section 2202(a)(3) of the CARES Act and that the recontribution is made in accordance with the rules under section 4.C of this notice. In making this determination, the rule in section 2.E of this notice applies. Thus, the administrator of an eligible retirement plan may rely on an individual’s certification that the individual satisfies the conditions to be a qualified individual in determining whether a distribution is a coronavirus-related distribution, unless the administrator has actual knowledge to the contrary.[33]

Note that a plan does not have to accept recontributions of coronavirus-related distributions.  As the Notice provides:

In general, it is anticipated that eligible retirement plans will accept recontributions of coronavirus-related distributions, which are to be treated as rollover contributions. However, eligible retirement plans generally are not required to accept rollover contributions. For example, if a plan does not accept any rollover contributions, the plan is not required to change its terms or procedures to accept recontributions of coronavirus-related distributions.[34]

Qualified Plan Loans

While CARES Act §2202(b) provides special short-term revisions to liberalize rules related to loans from qualified retirement plans to participants, the Notice makes clear an employer is not required to allow use of these revisions by plan participants:

As described in section 2.C of this notice, an employer is permitted to choose whether, and to what extent, to apply coronavirus-related plan loan rules described in this section (regardless of how coronavirus-related distributions are treated).[35]

If a plan sponsor decides to implement the provision, the CARES Act allows for an increase in the maximum amount a participant may borrow from the plan:

Special rules apply to a loan made from a qualified employer plan (as defined in § 1.72(p)-1, Q&A-2) to a qualified individual on or after March 27, 2020 (the date of enactment of the CARES Act) and before September 23, 2020. For these loans, section 2202(b)(1) of the CARES Act changes the limits under § 72(p)(2)(A) of the Code. In applying § 72(p) to a plan loan, the $50,000 aggregate limit in § 72(p)(2)(A)(i) is increased to $100,000 and the rule in § 72(p)(2)(A)(ii) limiting the aggregate amount of loans to 50 percent of the employee’s vested accrued benefit is increased to 100 percent of the employee’s vested accrued benefit.[36]

Since qualified retirement plans are regulated by both the IRS and the Department of Labor, in a footnote the Notice provides assurance that the Department of Labor will not take action against an employer implementing these provisions:

The Department of Labor has advised the Department of the Treasury and the IRS that it will not treat any person as having violated the provisions of Title I of the Employee Retirement Income Security Act (ERISA), including the adequate security and reasonably equivalent basis requirements in ERISA section 408(b)(1) and 29 CFR 2550.408b-1, solely because the person made a plan loan to a qualified individual during the period beginning on March 27, 2020, and ending on September 22, 2020, in compliance with CARES Act section 2202(b)(1) and the provisions of this notice. See EBSA Disaster Relief Notice 2020-01.[37]

The CARES Act also permits, but does not require, a plan to provide for suspension of payment on plan loans and a related extension of loan terms.  The Notice describes these permitted modifications as follows:

A special rule applies if a qualified individual has an outstanding loan from a qualified employer plan on or after March 27, 2020. Section 2202(b)(2) of the CARES Act provides that, for purposes of § 72(p), in the case of a qualified individual with a loan from a qualified employer plan outstanding on or after March 27, 2020, if the due date pursuant to § 72(p)(2)(B) or (C) for any repayment with respect to the loan occurs during the period beginning on March 27, 2020, and ending on December 31, 2020, the due date shall be delayed for 1 year. In addition, any subsequent repayments of the loan shall be adjusted appropriately to reflect the delay and any interest accruing during the delay, and the period of delay must be disregarded in determining the 5-year period and the term of the loan under § 72(p)(2)(B) and (C). The effect of section 2202(b)(2) of the CARES Act is to permit a delay in certain plan loan repayments without causing the loans to violate § 72(p)(2)(B) and (C). It does not, however, require a delay in plan loan repayments in order to satisfy § 72(p)(2)(B) and (C). Thus, an employer is permitted to choose to allow this delay in loan repayments under its plan with respect to qualified individuals, and, if it does, there will not be a deemed distribution to those individuals under § 72(p) due to the delay. For example, each repayment that becomes due during the period from March 27, 2020, through December 31, 2020, may be delayed for up to 1 year and then reamortized (taking into account interest) over a period that is up to 1 year longer than the original term of the loan. Each reamortized repayment may then be added to other reamortized repayments and to non-reamortized repayments to construct an overall loan reamortization schedule.[38]

The Notice provides for a safe harbor where the plan will be treated as satisfying the requirements necessary to avoid having the loan treated as a distribution under IRC §72(p) if the following steps are followed:

  • A qualified individual’s obligation to repay a plan loan is suspended under the plan for any period beginning not earlier than March 27, 2020, and ending not later than December 31, 2020 (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 1 year from the date the loan was originally due to be repaid.

  • If a qualified employer plan suspends loan repayments during the suspension period, the suspension will not cause the loan to be deemed distributed even if, due solely to the suspension, the term of the loan is extended beyond 5 years.

  • Interest accruing during the suspension period must be added to the remaining principal of the loan.

  • A plan satisfies these rules if the loan is reamortized and repaid in substantially level installments over the remaining period of the loan (that is, 5 years from the date of the loan, assuming that the loan is not a principal residence loan, plus up to 1 year from the date the loan was originally due to be repaid).

  • If an employer, under its plan, chooses to permit a suspension period that is less than the maximum suspension period described above, the employer is permitted to extend the suspension period subsequently, but not beyond December 31, 2020. [39]

Example Applying the Safe Harbor Notice 2020-50 Section 5.B.

On April 1, 2020, a participant with a nonforfeitable account balance of $40,000 borrowed $20,000 to be repaid in level monthly installments of $368.33 each over 5 years, with the repayments to be made by payroll withholding. The participant makes payments for 3 months through June 30, 2020. The participant is a qualified individual (as described in section 1.B of this notice). The participant’s employer takes action to suspend payroll withholding repayments, for the period from July 1, 2020, through December 31, 2020, for loans to qualified individuals that are outstanding on or after March 27, 2020. Because the participant is a qualified individual, no further repayments are made on the participant’s loan until January 1, 2021 (when the balance is $19,477). At that time, repayments on the loan resume, with the amount of each monthly installment reamortized to be $343.27 in order for the loan to be repaid by March 31, 2026 (which is the date the loan originally would have been fully repaid, plus 1 year).

The Notice recognizes that the above is meant to be treated as a safe harbor, not as the sole way to satisfy the law.  The Notice provides:

The Department of the Treasury and the IRS recognize that there may be additional reasonable, if more complex, ways to administer section 2202(b) of the CARES Act. For example, in a plan with a suspension period beginning April 1, 2020, each repayment that becomes due during the suspension period may be delayed to April 1, 2021 (the 1-year anniversary of the beginning of the suspension period). After originally scheduled repayments for January through March of 2021 are made, the outstanding balance of the loan on April 1, 2021, including the delayed repayments with interest, may be reamortized over a period that is up to 1 year longer than the original term of the loan.[40]

An employer can rely on an employee’s certification that he/she is a qualified individual under the same terms as provided for coronavirus-related distributions.  The same certification form may be used to satisfy documenting the employee’s qualification as was provided in the Notice for the certification for coronavirus-related distributions.[41]

Deferral Elections Under Nonqualified Deferred Compensation Plans

The IRS provided relief in this notice for certain cases involving nonqualified deferred compensation plans for situations where a service provider receives a coronavirus-related distribution from an eligible retirement plan.  The Notice provides:

Under § 1.409A-3(j)(4)(viii), a nonqualified deferred compensation plan subject to § 409A may provide for a cancellation of a service provider's deferral election, or such a cancellation may be made, due to an unforeseeable emergency or a hardship distribution pursuant to § 1.401(k)-1(d)(3). If a service provider receives a distribution from an eligible retirement plan that constitutes a coronavirus-related distribution, that distribution will be considered a hardship distribution pursuant to § 1.401(k)-1(d)(3) for purposes of § 1.409A-3(j)(4)(viii). As a result, a nonqualified deferred compensation plan may provide for a cancellation of the service provider's deferral election, or such a cancellation may be made, due to a coronavirus-related distribution described in section 1.C of this notice. The deferral election must be cancelled, not merely postponed or otherwise delayed.[42]

[1] Notice 2020-50, June 19 2020, https://www.irs.gov/pub/irs-drop/n-20-50.pdf (retrieved June 19, 2020)

[2] Notice 2020-50, Section 1.A.

[3] Notice 2020-50, Section 1.B.

[4] Notice 2020-50, Section 1.B.

[5] Notice 2020-50, Section 1.B.

[6] Notice 2020-50, Section 1.C.

[7] Notice 2020-50, Section 1.C.

[8] Notice 2020-50, Section 1.C

[9] Notice 2020-50, Section 1.C.

[10] Notice 2020-50, Section 1.C.

[11] Notice 2020-50, Section 1.C.

[12] Notice 2020-50, Section 1.C.

[13] Notice 2020-50, Section 1.C.

[14] Notice 2020-50, Section 4.A

[15] Notice 2020-50, Section 4.B.

[16] Notice 2020-50, Section 4.B.

[17] Notice 2020-50, Section 4.C.

[18] Notice 2020-50, Section 4.D.

[19] Notice 2020-50, Section 4.F.

[20] Notice 2020-50, Section 4.H.

[21] Notice 2020-50, Section 2.A.

[22] Notice 2020-50, Section 2.A.

[23] Notice 2020-50, Section 2.A.

[24] Notice 2020-50, Section 2.B.

[25] Notice 2020-50, Section 2.C.

[26] Notice 2020-50, Section 2.C

[27] Notice 2020-50, Section 2.C.

[28] Notice 2020-50, Section 2.D.

[29] Notice 2020-50, Section 2.E.

[30] Notice 2020-50, Section 2.E.

[31] Notice 2020-50, Section 2.F.

[32] Notice 2020-50, Section 3.A.

[33] Notice 2020-50, Section 3.B.

[34] Notice 2020-50, Section 3.B.

[35] Notice 2020-50, Section 5

[36] Notice 2020-50, Section 5.A.

[37] Notice 2020-50, Section 5.A., Footnote 2

[38] Notice 2020-50, Section 5.B.

[39] Notice 2020-50, Section 5.B.

[40] Notice 2020-50, Section 5.B.

[41] Notice 2020-50, Section 5.C.

[42] Notice 2020-50, Section 6