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IRS Expands COVID-19 Retirement Plan Relief

Posted on June 22, 2020

The IRS has expanded the categories of individuals who may tap into their retirement plans without taking a tax hit.

Notice 2020-50, 2020-28 IRB 1, released June 19, provides a list of additional factors — such as the rescission of job offers and delayed start dates — that may be taken into account when determining if an individual qualifies for relief under the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136).

The CARES Act allows retirement plan distributions of up to $100,000 to qualified individuals without imposing the normal early withdrawal penalty under section 72(t). The distributions are available only in 2020, and the amount distributed can be recontributed within three years. Any amounts repaid are treated as a tax-free rollover.

The legislation also increased the maximum amount available for a retirement plan loan to $100,000 and provided that loan repayments can be delayed for one year.

The notice answers many questions that employees, employers, and plan administrators have had about who qualifies for the relief and how the distributions and loans should be reported.

“As anticipated, the [coronavirus-related distribution] guidance largely tracks Notice 2005-92 [2005-2 C.B. 1165] and provides some important clarifications and expansions that will facilitate participants’ use of this much-needed relief,” Elizabeth Thomas Dold of Groom Law Group told Tax Notes.

Qualified Individual Definition

The statutory definition of a qualified individual includes someone who is diagnosed with COVID-19 or whose spouse or dependent is diagnosed, or someone who has experienced specified adverse financial consequences because of closures caused by the coronavirus.

As stated in the notice, the CARES Act authorizes Treasury and the IRS to expand the list of qualified individuals based on the adverse financial consequences they encounter. The guidance provides that qualified individuals also include those who are experiencing financial difficulty because:

  • they have had a reduction in pay or self-employment income because of COVID-19 or have had a job offer rescinded or start date delayed due to COVID-19;

  • they have a spouse or household member who has been quarantined, furloughed, or laid off, or had work hours reduced due to COVID-19, or is unable to work because of lack of child care, had a reduction in pay or self-employment income due to COVID-19, or had a job offer rescinded or start date delayed because of COVID-19; or

  • a business owned or operated by the individual’s spouse or household member has had to close or reduce hours because of COVID-19.

The addition of individuals whose spouse or household members are financially affected by COVID-19 “caught my eye,” said Seth J. Hanft of Baker & Hostetler LLP. “That is something we’ve had a lot of clients ask us about. . . . Essentially the IRS is opening it up to events that impact your spouse or a member of your household as being a reason that might trigger one of those distributions.”

Another helpful provision is that distribution amounts aren’t required to correspond to the extent of the adverse financial consequences experienced by the qualified individual, Hanft said.

“With hardship withdrawals, the amount is limited to the individual’s financial needs,” Hanft said. “We had hoped that these distributions wouldn’t be tied to financial need, but it’s nice to see the IRS actually come out and say that in this guidance. It makes it easier on employers who want to help their employees but don’t want to put themselves in an administrative paradigm where they need to dig into the personal lives of their employees to figure out whether they need these distributions.”

The provisions on how to administer and report the distributions are also welcome, said Hanft. “There’s very detailed information on [Form] 1099s and exactly how to code them,” he said. “That’s something employers were hoping to get guidance on.”

Dold said another significant provision permits cancellation of a deferral election under a nonqualified deferred compensation plan. “Hopefully up next will be guidance on the 2020 minimum required distribution relief,” she said.

No Surprises on Loan Suspension

The loan suspension provisions mirror what employers and plan administrators have already been doing, Hanft said.

The notice “confirms that the employer is free or not to allow qualified individuals to suspend payment of loans during the period,” Hanft said. “They’ve also provided a helpful safe harbor method for administering the loan suspension provisions. That method has been widely used by many of the major third-party administrators on the assumption that that’s how it would operate.”

Hanft noted that the guidance applies many of the principles set out in Notice 2005-92, which addressed Hurricane Katrina relief.

“The Hurricane Katrina guidance has been a road map for practitioners and third-party administrators on what to do,” Hanft said. The example in Notice 2020-50 applying the safe harbor “is exactly how a lot of administrators are rolling out the loan suspension provisions. So it’s helpful to know they did it right,” he added.

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