IRS Notice 2020-50
How Does It Impact You and Your Participants?
By Kiowa Speck, Senior Retirement Consultant
The Internal Revenue Service (IRS) recently published its long-awaited additional guidance regarding coronavirus-related distributions (CRDs) and loan provisions of the CARES Act (Section 2202). Notice 2020-50 is intended to help plan sponsors, recordkeepers, third party administrators (TPAs) and participants apply Section 2202 to benefit from expanded distribution and loan options.
As authorized under the CARES Act, Notice 2020-50 expands the definition of who is a qualified individual to take into account additional factors such as reductions in pay, rescissions of job offers, and delayed start dates with respect to an individual, as well as adverse financial consequences to an individual arising from the impact of the COVID-19 coronavirus on the individual’s spouse or household member.
As expanded under Notice 2020-50, a qualified individual is anyone who:
• is diagnosed, or whose spouse or dependent is diagnosed, with the virus SARS-CoV-2 or the coronavirus disease 2019 (collectively, “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); or
• experiences adverse financial consequences as a result of the individual, the individual’s spouse, or a member of the individual’s household (that is, someone who shares the individual’s principal residence):
o being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19;
o being unable to work due to lack of childcare due to COVID-19;
o closing or reducing hours of a business that they own or operate due to COVID-19;
o having pay or self-employment income reduced due to COVID-19; or
o having a job offer rescinded or start date for a job delayed due to COVID-19.
Notice 2020-50 also clarifies CRD withdrawal opportunities, tax reporting and recontribution options.
• A CRD is permitted to be taken in order repay a plan loan, including a qualified plan loan offset.
• All CRDs will be reported on Form 1099-R at year end.
• In general, a qualified individual who receives a coronavirus-related distribution that is eligible for tax-free rollover treatment is permitted to recontribute, at any time in a 3-year period, any portion of the distribution to an eligible retirement plan that is permitted to accept eligible rollover contributions. It is noted that, if a plan does not accept any rollover contributions, the plan is not required to change its terms or procedures to accept recontributions of CRDs.
Notice 2020-50 also provides information relating to the two income inclusion methods for CRDs that a qualified individual may choose from:
- Permitted to include the taxable portion of the distribution in income ratably over a 3-year period that begins in the year of the distribution.
- May elect out of the of the 3-year ratable income inclusion method and include the entire amount of the distribution in income on the year of the distribution.
The Notice offers guidance on the tax treatment of recontributions of coronavirus-related distributions. A qualified individual is permitted, at any time in the 3-year period beginning the day after the date of a coronavirus-related distribution, to recontribute any portion of the distribution, but not an amount in excess of the amount of the distribution, to an eligible retirement plan.
Qualifying individuals receiving a CRD can claim the tax favored treatment with respect to the distribution by reporting the distribution on the individual’s federal income tax return for 2020 and on Form 8915-E (Qualified 2020 Disaster Retirement Plan Distributions and Repayments)
About reliance on certifications. An administrator of an eligible retirement plan may rely on an individual’s certification that the individual satisfies the conditions to be a qualified individual in determining whether a distribution is a coronavirus-related distribution, unless the administrator has actual knowledge to the contrary. The Notice also provides an example of an acceptable certification.
Notice 2020-50 clarifies that employers can choose whether to implement these coronavirus-related distribution and loan rules, and notes that qualified individuals can claim the tax benefits of coronavirus-related distribution rules even if plan provisions aren’t changed on Form. The guidance clarifies that administrators can rely on an individual’s certification that the individual is a qualified individual, but also notes that an individual must actually be a qualified individual in order to obtain favorable tax treatment.
Further, Notice 2020-50 provides employers a safe harbor procedure for implementing the suspension of loan repayments otherwise due through the end of 2020, but notes that there may be other reasonable ways to administer these rules.
Also worth mentioning is IRS Notice 2020-51, which provides that an IRA owner or beneficiary that has already received a 2020 RMD distribution can repay the distribution to the IRA by August 31, 2020. This repayment is not subject to the one rollover per 12-month period limit and the restrictions on rollovers for inherited IRAs. This Notice also offers sample amendments that may be adopted by plan sponsors to give participants and beneficiaries whose RMDs are waived a choice as to whether to receive the waived RMD.