On June 19, 2020, the IRS issued Notice 2020-50, which provides additional guidance on Coronavirus Related Distributions and Loans from Retirement Plans under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). On June 23, 2020, the IRS issued Notice 2020-51, which provides additional guidance on the waiver of required minimum distributions for 2020. This communication provides information about the changes covered by both notices.
What are the major changes that impact plan sponsors and participants?
There are several changes that impact plan sponsors and participants, including:
More information on each of these items is below.
What changes impact eligibility for Coronavirus Related Distributions and enhanced Plan Loan Relief?
Under the CARES Act, the additional 10% tax is waived for an individual who takes a distribution on or after January 1 and before December 31, 2020, and meets the following requirements:
Notice 2020-50 adds additional criteria for an individual to become eligible:
Plan Sponsor Takeaways:
Did the IRS extend “self-certification” to Plan Loans? When can you rely on the certification?
Yes. Notice 2020-50 expands “self-certification” to Plan Loans, which was not previously available under the CARES Act. The plan administrator may rely on the certification for Coronavirus Related Distributions and Plan Loans unless he or she has actual knowledge to the contrary, but there is no obligation to investigate the certification. In addition, the IRS has provided a sample certification that plans can use. The sample is not mandatory, but does provide guidance on what the IRS would expect in a self-certification.
Plan Sponsor Takeaways:
Are periodic payments and distributions permitted to be Coronavirus Related Distributions?
Yes. Notice 2020-50 allows for distributions that are either a single payment or part of multiple distributions made during 2020, that satisfy the requirements for a Coronavirus Related Distribution can all be considered Coronavirus Related Distributions.
Plan Sponsor Takeaways:
Did the IRS provide guidance related to tax reporting for Plan Sponsors for Coronavirus Related Distributions?
Yes. Notice 2020-50 provides guidance to Plan Sponsors concerning tax reporting of Coronavirus Related Distributions with alternative options available.
The first crucial piece of guidance is that if the Plan Sponsor treats the distribution as a Coronavirus Related Distribution, a Form 1099-R must be issued, even if the distribution is repaid to the same plan within 2020.
The second piece of guidance is that the Plan Sponsor can treat the distribution before age 59½ as an “early distribution, exception applies (Code 2)” meaning the Plan Sponsor acknowledges the distribution is a Coronavirus Related Distribution.
Alternatively, the Plan Sponsor can treat the distribution before age 59½ as an “early distribution, no exception applies (Code 1)” meaning the Plan Sponsor is not reporting the distribution qualifies for Coronavirus Related Distribution treatment; however, the participant is entitled to treat the distribution as a Coronavirus Related Distribution on his/her personal tax return.
Plan Sponsors may or may not have responsibility for assigning codes to Coronavirus Related Distributions; the plan’s recordkeeper may have that responsibility.
Plan Sponsor Takeaways:
Did the IRS provide guidance on tax reporting for Plan participants who are eligible for Coronavirus Related Distributions?
Yes. The IRS provided guidance that the responsibility for tax treatment as a Coronavirus Related Distribution lies with the participant.
Participants are responsible for ensuring that distributions do not exceed the limitation of $100,000 (unless all distributions are from a single Plan Sponsor’s plan(s)). In addition, eligible participants can treat a distribution as a Coronavirus Related Distribution no matter how the Form 1099-R reports the distribution (Code 2 or Code 1).
Participants are also responsible for determining whether to pay all the tax due with the 2020 tax return, or spread the tax over three years as well as tax treatment for the participant if the participant repays the Coronavirus Related Distribution.
Plan Sponsor Takeaways:
What changes impact plan loans?
As mentioned above, the first significant change is that the IRS will allow self-certification for participants who wish to take expanded loans under the CARES Act, rather than limiting self-certification only to Coronavirus Related Distributions.
The IRS also provided guidance through an example on how repayments of suspended loans can be re-amortized upon recommencement of payments after suspension.
Although the IRS provided guidance through the example, the IRS also indicated that other methods of calculating repayments could be chosen by the Plan Sponsor as long as such method is reasonable. Presumably, a method that is similar to methods used when an individual returns from a leave of absence could provide insight into alternative methods.
Plan Sponsor Takeaways:
Were there changes impacting the 2020 Required Minimum Distribution (RMD) waiver?
Yes. Per Notice 2020-51, the following amounts may be rolled over:
In addition, the 60-day period for amounts that may be rolled over because of the RMD waiver for 2020 that would have otherwise expired has been extended to August 31, 2020. The extension also applies to the time for repaying the distribution to the plan.
Amounts that would have been RMDs that are rolled over by the August 31, 2020 deadline will not be considered rollovers for purposes of determining whether the one rollover in a twelve-month period for IRAs has been satisfied.
Please consider the following example.
Example:
With the application of Notice 2020-51:
The IRS provided Q&As with additional technical guidance in the notice. Finally, the notice provides a sample plan amendment for implementing the RMD waiver.
Plan Sponsor Takeaways:
Were there any changes impacting Nonqualified Deferred Compensation plans?
Yes. Treasury Regulation section 1.409A-3(j)(4)(viii) provides that deferred compensation elections may be cancelled upon distribution for unforeseeable emergency or hardship. Notice 2020-50 provides that a Coronavirus Related Distribution will be considered a hardship distribution for purposes of non-qualified deferred compensation and as such deferred compensation elections can be cancelled.
Plan Sponsor Takeaways:
We will continue to monitor additional guidance from the IRS and/or Department of Labor and provide updates as necessary. As always, please contact your Pensionmark advisor if you have any questions.