IRS Expands CARES Act Retirement Relief with Distributions and Loans

The CARES Act provides retirement plan sponsors with the option of allowing for withdrawals with special tax treatment, increased participant loans, and delayed repayment of participant loans for their plan participants that have been financially impacted by the coronavirus.

In a welcome development, Notice 2020-50 provides additional factors not explicitly provided in the law for the definition of a “qualified individual” who is eligible for these provisions if their employer has adopted them for their retirement plan.

The law previously specified that a qualified individual is someone:

• 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 (including a test authorized under the Federal Food, Drug, and Cosmetic Act);
• Whose spouse or dependent (as defined in section 152 of the Code) is diagnosed with COVID-19 with an approved test; or
• Who experiences adverse financial consequences as a result of:
  • The individual being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19;
  • The individual is unable to work due to lack of childcare due to COVID-19; or
  • Closing or reducing hours of a business owned or operated by the individual due to COVID-19.

This definition did not cover the situation where a plan participant’s spouse or another member of their household had reduced income because of COVID-19. Notice 2020-50 now adds the following additional factors to the qualified individual definition:

• The individual having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19;
• The individual’s spouse or a member of the individual’s household (as defined below) being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; or
• Closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.

For purposes of applying these additional factors, a “member of the individual’s household” is someone who shares the individual’s principal residence.

In addition to the expansion of the qualified individual definition, the notice serves as a comprehensive summary of coronavirus-related loan and withdrawal rules.

Other highlights include:

• Clarifying that the CARES Act provisions are optional for the employer, including the option to adopt only one or some of the provisions.
• Confirming that the employer may rely on a self-certification from the employee regarding their status as a qualified individual unless they have actual knowledge to the contrary, and also provides a sample certification.
• Clarifying that an employer may rely on an employee’s certification regarding the re-contribution of a coronavirus-related distribution and that the employee was a qualified individual for the purpose of the withdrawal (unless the employer has actual knowledge to the contrary).
• Providing guidance for the employee’s tax treatment of a coronavirus-related distribution and provides examples, and mentions the soon to be published Form 8915-E which will be used to report coronavirus-related distributions and recontributions.
• Providing a safe harbor for the suspension of loan payments and extension of loan terms that are allowable under the CARES Act.

As always, your Aldrich Retirement Solutions team is here to provide support for you however we can during these rapidly changing times. If you have questions about Notice 2020-50 or the CARES Act, please contact your advisor or David Strom. For more employer resources to help you navigate the developing impact of coronavirus on your business, visit our COVID-19 Resource Center.

This article is a summary of IRS Notice 2020-50 and is provided as a service to our clients and friends. It should not be relied upon for tax advice.