IRS Clarifies And Expands On Retirement Plan Relief Under The CARES ActJune 29, 2020
In order to expand on and clarify certain requirements under the recently passed Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), the Internal Revenue Service (IRS) recently released guidance in two separate Notices (IRS Notice 2020-50 and IRS Notice 2020-51).
Expansion of Participant Pool Eligible for CARES Act Relief. The CARES Act allows certain “qualified individuals” to take COVID-related distributions of up to $100,000 in distributions from eligible retirement plans made on or after January 1, 2020, and before December 30, 2020. These “qualified individuals” are also eligible for certain relief relating to plan loan amounts and repayment terms. As originally drafted, “qualified individuals” only included: (1) individuals diagnosed with the virus; (2) individuals with a spouse or dependent diagnosed with the virus; or (3) individuals who suffered financial loss from COVID-19 because they were furloughed, quarantined, or had hours reduced, could not work due to unavailability of childcare, or owned or operated a business that had to close or reduce its hours. However, under the new IRS guidance, the participant pool eligible to benefit from the CARES Act distributions and plan loan relief has been expanded to include:
- Anyone diagnosed, or a spouse or dependent diagnosed, with COVID-19 by a test approved by the Centers for Disease Control and Prevention (the CDC); and
- Any individual who experiences adverse financial consequences as a result of the individual, the individual’s spouse, or a member of the individual’s household that is:
- Being quarantined, furloughed or laid off, or experiencing a reduction in hours due to COVID-19;
- Unable to work due to lack of childcare due to COVID-19;
- Closing or reducing hours of a business they own or operate due to COVID-19;
- Having pay or self-employment income reduced due to COVID-19; or
- Having a job offer rescinded or start date for a job delayed due to COVID-19.
The guidance also clarified that any qualified individual’s CARES Act distribution does not have to correspond with the extent of the individual’s financial hardship. Rather, an individual must only meet the criteria of a qualified individual under the new guidance.
Self-Certification. As plan administrators sought to implement the CARES Act provisions, many expressed concern regarding the self-certification process. Under the new guidance, the IRS clarified that employers may currently rely on an individual’s self-certification as a qualified individual to determine if a distribution is permissible, unless the employer has “actual knowledge” to the contrary. However, employers are not required to investigate an individual’s current circumstances. The “actual knowledge” restriction is limited to situations where the employer already has information that may contradict the participant’s self-certification. Employers may also rely on self-certification for recontributions and loan relief. For employers seeking further clarification on the self-certification process, the IRS has provided a sample self-certification letter.
Plan Loan Safe Harbor. IRS Notice 2020-50 also provides a safe harbor for enabling qualified employer plans to satisfy the retirement plan loan provisions of the CARES Act. Employers will meet the CARES Act requirements for implementing the suspension of loan repayments otherwise due through the end of 2020 as long as a qualified individual’s obligation to repay a plan loan is suspended for any period between March 27, 2020, and December 31, 2020 (referred to as the “suspension period”). If a qualified employer plan suspends loan repayments during the suspension period, then 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 five years. The loan repayments must resume after 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. Any interest accrued during the suspension period must be added to the remaining principal balance of the loan.
Required Minimum Distribution Relief. The CARES Act waives the 2020 required minimum distribution (RMD) and the 2019 RMD that was due by April 1, 2020, from defined contribution plans and IRAs. Additionally, the IRS added rollover relief and deadline extensions relating to RMDs. First, the IRS guidance clarifies that any 2020 RMD can be “undone” and repaid back into the qualified retirement plan tax-free, as long as that RMD would have been required had the CARES Act not passed. Second, the IRS extended the rollover deadline for RMDs already taken in 2020. Generally, RMD rollovers must be completed within 60 days, and any RMDs taken between February 1, 2020, and May 15, 2020, were due by July 15, 2020. However, the new guidance extends the 60-day rollover period and allows retirees who took an RMD between January 1, 2020, and June 30, 2020, to make their rollovers by August 31, 2020. Finally, for those employers seeking further assistance implementing the new RMD relief, IRS Notice 2020-51 provides a sample plan amendment.
If you have any questions about the recent clarifications to retirement plan relief under the CARES Act, please reach out to any member of the McGrath North Employee Benefits Group.
Contact information for the complete McGrath North’s COVID-19 Response Team can be found here.
For information regarding additional business-related concerns centered around COVID-19, please visit our COVID-19 Resource Guide here.