Benefits Update: Coronavirus-Related Relief for Retirement Plans
The IRS recently issued guidance addressing application of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) provisions for relief relating to distributions from eligible retirement plans, waiver of required minimum distributions, and applicable reporting requirements. The IRS has also granted new coronavirus-related relief for nonqualified deferred compensation plans and safe harbor defined contribution plans.
Qualification for Coronavirus-Related Distributions
Under the CARES Act, taxpayers can withdraw up to $100,000 from a qualified retirement plan or individual retirement account (“IRA”) in 2020 without application of the 10% early withdrawal penalty. Unlike most economic relief granted under the CARES Act, favorable tax treatment in this case is not automatically granted to taxpayers. To qualify, an individual must certify that they or their spouse or dependent have been diagnosed with COVID-19 or experience adverse financial consequences due to:
- being quarantined,
- being furloughed or laid off or having work hours reduced due to such virus or disease,
- being unable to work due to lack of child care due to such virus or disease,
- closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or
- other factors as determined by the Treasury Secretary.
IRS Notice 2020-50 expands the affected persons to include a “member of the individual’s household” who shares the individual’s principal residence (e.g. a roommate or significant other). The Notice also provides an example of an acceptable certification statement for use by plan administrators to qualify, unless the administrator has actual knowledge to the contrary. Although the administrator has discretion to develop any reasonable procedures for identifying which distributions are treated as coronavirus-related distributions, any such procedures must be applied consistently to all similar distributions.
Distribution Timing Rules
Retirement funds normally subject to certain distribution restrictions under a 401(k), 403(b), governmental 457(d) plan or Thrift Savings Plan are available for coronavirus-related distribution despite being paid prior to an otherwise permitted distributable event (e.g., age 59 1/2 or hardship). Importantly, amounts payable under pension plans remain subject to distribution restrictions and spousal consent requirements.
Participant Loan Repayment Safe Harbor
Individuals with outstanding participant loans becoming due and payable in 2020 may suspend loan repayments through December 31, 2020 under the CARES Act. Subsequent repayments must be adjusted to reflect the delay and any interest accruing during the delay. Notice 2020-50 provides a safe harbor method for administrating permitted suspensions and extensions of participant loans.
Rollover Treatment and Reporting Requirements
Qualified individuals are granted a three-year period in which to recontribute a coronavirus-related distribution under the CARES Act. The Notice excludes non-spouse beneficiaries and clarifies that an eligible retirement plan that does not otherwise accept rollover contributions is not required to amend its terms to accept such recontributions.
The qualified plan rules for eligible rollover distributions are not applicable to coronavirus-related distributions. Accordingly, a plan is not required to offer the qualified individual a direct rollover with respect to the distribution, nor is a plan required to provide a safe harbor rollover notice or withhold an amount equal to 20% of the distribution. Although withholding is not required, each qualified individual must be provided an opportunity to elect voluntary withholding.
Coronavirus-related distributions must be reported on Form 1099-R even if the qualified individual recontributes the amount to the same eligible retirement plan in the same year. If no other appropriate code applies, the payor is permitted to use distribution code 2 (early distribution, exception applies) in box 7 of Form 1099-R. However, a payor also is permitted to use distribution code 1 (early distribution, no known exception) in box 7 of Form 1099-R.
Nonqualified Deferred Compensation Plan Elections
Notice 2020-50 provides that a service provider’s receipt of a coronavirus-related distribution from an eligible retirement plan is a hardship distribution for purposes of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”). Accordingly, nonqualified deferred compensation plans may be amended to provide that receipt of a coronavirus-related distribution: 1) automatically suspends the individual’s deferral elections for 2020, or 2) allows the individual to elect to cancel their deferral elections for 2020.
Rollover Period for Waived Required Minimum Distributions (RMDs)
Individuals required to withdraw a required minimum distribution (RMD) from their defined contribution plan account or IRA in calendar year 2020 are granted relief under the CARES Act. This relief applies to RMDs not withdrawn before January 1, 2020, and RMDs payable in 2020 due to a required beginning date occurring in 2020 under plan terms. Notice 2020-51 grants those who already received an RMD in 2020 an extended period to roll the RMD amount back into a retirement account. The new deadline for rollover of waived RMDs is August 31, 2020. Such rollover is not subject to the one rollover per twelve-month period limitation or the restrictions on rollovers for inherited IRAs. Notice 2020-51 also provides a sample amendment plans may adopt to give participants a choice as to whether to receive the waived RMD.
Mid-Year Amendments to Safe Harbor Plans
Notice 2020-52 provides safe harbor defined contribution plans flexibility to reduce or suspend safe harbor contributions mid-year due to the ongoing COVID-19 pandemic. If a plan amendment that reduces or suspends safe harbor matching contributions or safe harbor nonelective contributions during a plan year is adopted between March 13, 2020, and August 31, 2020, the plan will not be treated as failing to satisfy safe harbor requirements.
Regarding the supplemental notice requirement, temporary relief is available for changes to safe harbor nonelective contributions. Notice requirements will be deemed satisfied if: 1) the supplemental notice is provided to eligible employees no later than August 31, 2020, and 2) the applicable plan amendment is adopted no later than the effective date of the reduction or suspension of safe harbor nonelective contributions. The IRS has not granted relief with respect to the timing of supplemental notices for mid-year changes to safe harbor matching contributions. Thus, a supplemental notice regarding an amendment to reduce or suspend safe harbor matching contributions must be provided to eligible employees at least 30 days before the effective date of the amendment.
Please contact an attorney from Honigman’s Employee Benefits practice group for advice on how to adjust your retirement plan design or procedures to comply with the COVID-19 relief discussed herein.