On June 19, 2020, the IRS released Notice 2020-50 (the Notice) which provides additional guidance on tax-favored distributions from retirement plans and expanded plan loan relief under the “Coronavirus Aid, Relief, and Economic Security Act” (the CARES Act).

As noted in our prior alert, the CARES Act provides that during the period January 1, 2020 to December 30, 2020, “qualified individuals” may take coronavirus-related distributions of up to $100,000 from their eligible retirement plans. A qualifying coronavirus-related distribution is not subject to the 10% additional tax on early distributions that would otherwise normally apply to distributions made before an individual reaches age 59 ½. In addition, a coronavirus-related distribution can be included in income ratably over the three-year period commencing with the year of distribution and the individual taking the distribution has three years to repay the distribution to the plan, if they so choose, which has the effect of reversing the tax income tax consequences of the distribution.

In addition, the CARES Act provides that plans may implement relaxed rules for qualified individuals relating to retirement plan loan amounts and repayment terms. Specifically, plans may suspend loan repayments that are due from March 27 through December 31, 2020, and the dollar limit on loans made between March 27 and September 22, 2020, is increased from $50,000 to $100,000.

Expanded Definition of Qualified Individuals

Both the coronavirus-related distributions and the relaxed loan provisions are only available to “qualified individuals.” Under the original text of the CARES Act a “qualified individual” was limited to:

  1. A Plan participant (or the participant’s spouse or tax dependent) who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention, or
  2. A Plan participant who experiences adverse financial consequences as a result of 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 Secretary of the Treasury.

Under the Notice, clause (2) above is expanded to include a participant’s spouse or member of the participant’s household (i.e., someone who shares the participant’s principal residence) who is suffering such adverse financial consequences and the qualifying adverse financial consequences are expanded to include 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.

Further Clarification

The Notice also clarifies that the coronavirus-related distribution and loan rules are optional. Thus, employers can choose whether or not to implement the rules. However, qualified individuals can claim the beneficial tax treatment of a coronavirus-related distribution even if plan provisions are not amended to include those rules. However, the Notice does note that certain distributions can never be treated as coronavirus-related distributions (for example, distributions to correct Code Section 402(g), Code Section 415 or ADP/ACP test results).

The Notice also clarifies that plan administrators can rely on an individual’s certification that the individual is a qualified individual (but specifically noted that an individual must actually be a qualified individual in order to use these rules).

The Notice also includes a safe harbor procedure employers can use for implementing the suspension of loan repayments otherwise due during 2020. However, the Notice does indicate that there may be other reasonable ways to administer these rules.

For more, please contact your Baker McKenzie Employment and Compensation attorney.

Special thanks to the author, Christopher Guldberg.