On June 19, 2020, the Internal Revenue Service (“IRS”) issued guidelines (Notice 2020-50) clarifying many aspects of the retirement plan withdrawal and loan relief provisions of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”).

The CARES Act contains three main elements of loan withdrawal and relief:

  • Some employer-sponsored pension plans and IRAs may allow COVID-19 affected participants (“eligible persons”) to receive special distributions of up to $ 100,000, which receive favorable tax treatment and may be voluntarily contributed to the same or another eligible plan. (“CARES Withdrawals” and “CARES Rewards”, respectively).
  • The CARES Act temporarily adjusted the loan limits for an employer’s 401 (k) or 403 (b) plan to the lesser of $ 100,000 or 100% of a member’s acquired account balance (increased from thresholds of $ 50,000 or 50%) (“CARES loans”).
  • An employer’s 401 (k) or 403 (b) loan program may allow eligible individuals to defer certain loan payments for up to 1 year (“CARES Loan Deferment”).

The IRS has also issued guidelines regarding the minimum distributions required for 2020 for 401 (k) and other defined contribution pension plans, which we discuss in a separate blog post.

As described in our previous article, the Katrina Emergency Tax Relief Act of 2005 (“KETRA”), had withdrawal and loan relief provisions very similar to those in the CARES Act, and the IRS had previously published FAQs indicating that the IRS would apply Generally the principles of its KETRA advice on loan relief and withdrawals under the CARES Act.

Eligible individuals

The IRS has broadened the categories of participants who can benefit from a CARES withdrawal, a Cares loan, or a CARES loan deferral. The CARES Act defines an eligible person to include a participant who is, or whose spouse or dependent is diagnosed with COVID-19, or who suffers financial consequences as a result of quarantine, leave , termination or reduction of hours as a result of COVID-19 (or owning or operating a business that has to close or reduce hours due to COVID-19), be unable to work due to a lack of custody due to COVID-19, or other factors determined by the Treasury and IRS.

Opinion 2020-50 expands the definition of eligible persons to include those who suffer negative financial consequences as a result of:

  • the person experiences a reduction in pay (or self-employment income) due to COVID-19 or has a job offer canceled or the job start date delayed due to COVID-19;
  • the individual’s spouse or a member of the individual’s household (as defined below) being quarantined, discharged or laid off, or having reduced working hours due to COVID-19, being unable to work due to lack of child care due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having an offer of job canceled or job start date delayed due to COVID-19; Where
  • closing or reducing the hours of operation of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.

For the purposes of applying these additional factors, a member of the individual’s household is a person who shares the individual’s principal residence.


The CARES Act allows plan administrators to rely on employee self-certifications that they are eligible persons for the purposes of determining whether a distribution qualifies for a CARES withdrawal. Advisory 2020-50 specifies that plan administrators can rely on certification of eligible person status for all purposes (CARES withdrawal, CARES loan, and CARES loan deferral), and not just for the purpose of CARES withdrawal.

While it is not possible to rely on self-certifications as long as the administrator has real knowledge to the contrary, Public Notice 2020-50 specifies that a plan administrator is not obligated to verify whether a person meets the qualifying person standard. Notice 2020-50 also provides an example of an acceptable certification.

Eligible plans

The CARES Act allows the following types of plans to allow a CARES withdrawal notwithstanding regular restrictions on plan distributions:

  • 401 (k) plans
  • 403b) regimes
  • Government plans 457 (b)

However, regular distributions from other qualified pension plans and IRAs may be treated as CARES withdrawals for certain purposes (for the purposes of individual tax treatment and eligibility to make a CARES Recontribution) even though the distribution plan / employer did not classify it as a CARES withdrawal.

Notice 2020-50 specifies that CARES withdrawals are not permitted under a defined benefit pension plan or a defined contribution pension plan, unless a member is otherwise entitled to a distribution, for example due to termination of employment. CARES withdrawals are also not exempt from spousal consent requirements that otherwise apply in the plan.

CARES Withdrawals

A CARES withdrawal is a distribution made from a pension plan to a qualifying person on or after January 1, 2020 and before December 31, 2020, up to an aggregate limit of $ 100,000 from all plans and IRAs. This limit applies to all plans maintained by employers within the controlled group.

The pension plan is not required to provide plan members with a rollover notice or withhold 20% of the distribution for a qualifying rollover distribution – although CARES withdrawals are subject to voluntary withholding.

Certain distributions may not be treated as CARES withdrawals, including distributions from excess carryforwards or distributions deemed to result from payment default. However, an eligible individual may be able to avoid the adverse tax consequences of a deemed distribution through the CARES Act relief alternatives. For example, if the participant has sufficient funds in their account, they may be able to make a CARES withdrawal to repay the loan to avoid or remedy a default before a suspected distribution occurs. Alternatively, they can choose a CARES loan deferral.

The member may consider a withdrawal to be a CARES withdrawal on their individual tax return even if it was not treated as a CARES withdrawal by the plan. Conversely, in some cases, a pension plan might treat a distribution as a CARES withdrawal, even though the eligible person does not (for example, because the eligible person received total distributions on multiple unrelated pension plans in excess of $ 100,000).

CARES Rewards

CARES withdrawals can be returned to an IRA or pension plan that accepts rolling contributions within three years from the date the CARES withdrawal was received, and the amount of any CARES Reimbursement may be excluded from income.

The IRS anticipates (but does not specifically require) that pension plans that accept rollover contributions will accept payouts from CARES withdrawals. The plan can be supported by attestations that the new contribution is authorized under the CARES Act (i.e. it is a new contribution within 3 years of a CARES withdrawal) . Amounts paid into a CARES Reward are treated as direct rollover contributions.

Reporting CARES withdrawals

Pension plans are required to report CARES withdrawals on Form 1099-R (even if the amounts are contributed in the same year). Notice 2020-50 specifies that they can be reported using distribution code 1 or distribution code 2 in box 7 of Form 1099-R.

CARES loans

Notice 2020-50 helps eligible individuals take advantage of the relaxed rules for accessing and repaying plan loans under the CARES Act. In particular, (i) employers are not required to verify a member’s status as a Qualified Person, but may instead rely on the member’s self-certification, unless the plan administrator knows otherwise. ; (ii) the dollar limit for plan loans contracted between March 27, 2020 and September 22, 2020 is increased from $ 50,000 to $ 100,000; and (iii) plans can suspend loan repayments until the end of 2020.

CARES loan deferment

The CARES Act loan suspension rules allow an eligible person with a plan loan outstanding on or after March 27, 2020, to delay by one year any payment that becomes due during the period beginning March 27. 2020 and ending December 31, 2020. Any subsequent loan repayments must be adjusted to reflect late payments and accrued interest during such delay. The delay period is not taken into account for the purposes of the maximum loan term of 5 years. Notice 2020-50 specifies that a loan suspension is an option for plans.

Notice 2020-50 provides plan administrators with a safe haven procedure for loan deferrals. Administrators can amortize the loan on January 1, 2021, when repayments resume (taking into account the loan balance at the time of suspension plus interest accrued on the balance throughout the deferred period) and authorize repayments over the period. remaining loan plus one year. Some plan administrators cautiously anticipated that the loan term could only be extended for the deferral period.

Allowing a one-year extension of the loan term is a favorable outcome for participants, especially for those who choose a loan deferral later in 2020. For example, if an eligible person chooses a CARES loan deferral in November 2020, the postponement will not allow them to miss a payment before the payments resume. However, under the new safe harbor, the participant would still benefit from the CARES loan deferral, as the remaining payments could be spread over a longer loan term resulting in lower payments. If the loan term was extended only by the deferment period, the drop in payment due to the one month loan extension would be very modest.

This safe harbor is not the only way to allow a one-year loan deferral, but it provides regulatory certainty and is an administratively practical approach to complying with loan deferral rules.

Non-qualified deferred compensation

An employee’s election to defer compensation under a non-qualifying deferred compensation plan (a 409A plan) is generally “locked-in” for the calendar year in which the election is made. But an employee can stop deferrals under a 409A plan if they receive either an unforeseeable emergency distribution under the 409A plan or a hardship distribution from the 401 (k) plan (or other emergency plan). qualified defined contribution pension applicable). Notice 2020-50 specifies that a CARES withdrawal from a 401 (k) plan (or other applicable qualifying defined contribution plan) will be treated as a hardship distribution for the purposes of allowing an employee to cancel. the choice of postponement.

Modification deadline

An employer-sponsored non-government pension plan does not require modification to implement the CARES withdrawal and loan relief before the last day of the first year of the plan beginning on or after January 1, 2022 (IRC section 414 (d) government plans have until the last day of the first plan year beginning on or after January 1, 2024).

Notice 2020-50 notes that the IRS may further extend these change deadlines in subsequent directives.

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