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IRS Updates Guidance on Coronavirus-Related Distributions and Retirement Plan Loans

The IRS has issued two notices to provide new guidance on CRDs and loans from retirement plans to help participants cope with the financial effects of the coronavirus pandemic.

 

Expanded categories for eligibility for CRDs

The IRS issued Notice 2020-50 on June 19 to provide updated guidance regarding the expanded categories of individuals who are eligible for Coronavirus-Related Distributions (CRDs) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted in March.

These include individuals who are facing adverse financial consequences due to circumstances surrounding COVID-19 such as the following:

  • A reduction in pay or self-employment income
  • A rescinded job offer or a delayed start date at a new job
  • A spouse or a household member* being quarantined, furloughed or laid off, working fewer hours, or being prevented from working by lack of childcare
  • Closing or reduction in hours of a business owned or operated by the individual’s spouse or household member

*For this purpose, a household member includes someone who shares the individual’s principal residence.

This is available until the end of 2020 for participants in 401(k)-type plans or individual retirement accounts (IRAs) who fall under the specified categories.

Coronavirus-related distributions may not exceed $100,000 per eligible participant. They are exempt from the 10 percent early-distribution penalty and may be repaid with a 3-year period. (Normally, a hardship distribution is not an eligible rollover distribution.)

While withdrawn amounts are still subject to income taxes, the law gives individuals 3 years to pay taxes on CRD income. These repayments are not subject to annual retirement plan contribution limits.

Employers can use the sample certification included in the notice. Rather than ask the individual for a specific reason, the certification simply requires the applicability of one of the specified acceptable reasons to their situation.

Guide for qualified plan sponsors

Normal distribution rules still apply

They still apply. The CRDs and loans permitted by the CARES Act are not mandatory. However, the notice specifies that plans must still comply with the normal distribution rules for a plan. This is the same for defined benefit plans, which require a spousal consent form for distribution options other than a joint and survivor annuity, even if the distribution is otherwise coronavirus related.

Individual income tax reporting

To the extent that you do not adopt CRD and loan provisions, the participant is still entitled to treat the distribution as a tax-favored coronavirus-related distribution on their federal income tax return.

Plan loans

The notice provides plans a safe harbor method for the following purposes:

  • To allow loan repayments to be postponed for a year under the CARES Act
  • To address adjustment of subsequent loan repayments, interest, deemed distributions, and re-amortization

An individual’s certification regarding plan loans under the CARES Act may suffice for a plan administrator.

2020 required minimum distributions (RMDs) waiver

IRS Notice 2020-51, issued June 23, provides guidance regarding the waiver of 2020 Required Minimum Distributions (RMDs) under the CARES Act, which postponed RMDs for defined contribution plans and IRAs for 2020.

The notice includes a sample plan amendment that plan sponsors can adopt to implement the waiver for 2020 RMDs. Plan amendments should be accomplished by the last day of the plan year beginning on or after January 1, 2022.

Do you need expert help with sorting out COVID-19–related retirement plan loans?

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This article provides general information and shouldn’t be construed as legal or HR advice. Since employment laws may change over time and can vary by location and industry, please consult a lawyer or HR expert for advice specific to your business. You can also contact Payroll Systems to inquire about our HR support services.