On June 19, 2020, the Internal Revenue Service (“IRS”) published Notice 2020-50 (“Notice”), expanding the definition of a Qualified Individual (“QI”) as well as providing helpful guidance on Coronavirus-Related Distributions (“CRDs”) and plan loans under the CARES Act. Below are some key takeaways from the Notice.
The Notice expands the definition of a QI to include the following as eligible for CRDs and loans:
- Participants who experience a reduction in pay (or self-employment income) due to COVID-19 or a job offer rescinded or job start date delayed due to COVID-19;
- Participants whose spouse or a member of their household (as defined below) experiences adverse financial consequences as a result of:
- being quarantined, furloughed or laid off, having work hours reduced or a reduction in pay (or self-employment income) due to COVID-19;
- unable to work due to lack of childcare due to COVID-19;
- having a job offer rescinded or start date for a job delayed due to COVID-19; or
- the closing or reduction of hours of a business owned or operated by a spouse or a member of the participant’s household due to COVID-19.
For purposes of the definition of QI, a “member of the household” is someone who shares the QI’s principal residence.
Guidance for Retirement Plans
The Notice clarified that employers are not required to offer CRDs or loan relief under the CARES Act. An employer can elect to implement all the provisions, only part of the provisions, or none of them. Regardless of what an employer determines, QIs can take advantage of the tax benefits under the rules whether or not an employer chooses to adopt the relief provisions.
Tax Treatment of Coronavirus-Related Distributions
Distributions made to QIs that otherwise meet the CRD criteria will be treated as if it were a CRD for tax purposes. Employers are encouraged by the IRS to develop their own reasonable procedures for identifying which distributions should be treated as CRDs for tax reporting purposes. The Notice also provided a sample “self-certification” form for employers to use when issuing a CRD as well as clarified that employers may rely on a participant’s self-certification without the responsibility to confirm if a participant has satisfied the CRD requirements.
In addition, the Notice provides helpful guidance and examples illustrating how employers and participants should handle the reporting of CRDs for tax, income and recontribution purposes.
CARES Act Loans
The Notice created a safe harbor for the suspension of loan payments. Under the safe harbor, a plan will be treated as satisfying the requirements of the CARES Act if a QI’s obligation to repay a loan is suspended for payments due between March 27, 2020, and December 31, 2020. The term of a loan may be extended for up to one year from the date the loan was originally due, even though the suspension period was not a year. This is true even if this would extend the loan beyond the maximum 5-year term.
While the loan repayment period may be extended for the period of a year, loan payments should recommence as of January 1, 2021. The safe harbor provides that a loan should be re-amortized and repaid in equal installments over the remaining period of the loan. However, the IRS did indicate there may be additional ways employers can administer suspended loans and still be compliant.
If you have any questions regarding the recent guidance or questions in general about the relief under the CARES Act, please contact your Nyhart consultant for more information.