Almost three months after the passing of the CARES Act in March, the Internal Revenue Service issues some much sought-after, additional guidance on various CARES Act provisions that had been left up to interpretation.
A primary intention of the CARES Act was to provide relief for individuals impacted by the COVID-19 pandemic. You can view our original CARES Act Summary here. However, a few provisions of the Act lacked the clarification that was necessary for retirement plan recordkeepers and plan administrators to feel confident that they were operating in full compliance. IRS Notices 2020-50 and -51, issued on June 19, 2020 and June 23, 2020, respectively, aimed to provide that guidance. Here are a few retirement-related points of clarification the IRS issued on the CARES Act.
Coronavirus-Related Distributions (CRDs)
- Distributions received by a beneficiary that is a “qualified individual” may be treated as a CRD for taxation purposes, but cannot be recontributed.
- A reduction or offset of a qualified individual’s account balance to repay a loan is permitted to be treated as a CRD.
- Hardship distributions made during the effective time period that meet the requirements under the CARES Act may be recharacterized as a CRD for all intents and purposes.
- Plans can include amounts attributable to elective deferrals, qualified nonelective contributions, qualified matching contributions, or safe harbor contributions for CRDs.
- Plan is not required to provide 402(f) notice or to withhold 20% of distribution for CRDs, as is usually required otherwise. However, CRDs are still subject to voluntary withholding requirements, and 10% will be withheld unless the participant elects otherwise.
Defining a Qualified Individual
- Eligibility for a CRD is conditioned upon a participant meeting the following criteria: is diagnosed with COVID-19, who spouse or dependent is diagnosed with COVID-19, who experience adverse financial consequence due to furlough, quarantine, layoff, reduction in hours, inability to work due to lack of child care due to COVID-19 or closing of business.
- This definition has now been updated to include a participant having a reduction in pay or having a job offer rescinded or start date delayed due to COVID-19, and also a participant whose spouse or member of the individual’s household experiences any of the above-mentioned eligibility requirements.
- A member of the individual’s household has been further defined as someone who shares the individual’s principal residence.
Required Minimum Distributions
- Distributions taken in 2020 that would have been required minimum distributions (“RMD”) can be treated as a CRD due to the CARES Act’s suspensions of RMDS in 2020.
- Participants who have already received distributions in 2020 have an extension of the 60 day period for rollover to August 31, 2020.
- Participants receiving substantially equal installment distributions that may have been, in whole or in part, RMDs, may be rolled over.
As a reminder, plans can adopt the new rules immediately. However, the plan will eventually need to be amended on or before the last day of the first plan year beginning on or after January 1, 2022, or later if prescribed by the Secretary of the Treasury.