2020 has been a difficult year with many unexpected challenges. For companies that sponsor retirement plans, some of these challenges came in the form of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. While the CARES Act provided much needed relief to plan sponsors and their participants, the relief also brought new complexity to retirement plan compliance.
Coronavirus-Related Distributions (CRDs) – Under the CARES Act, a qualified individual is permitted to take a distribution of up to $100,000 without being subject to the 10% penalty typically applied to distributions made prior to age 59 ½. Affected participants may spread the taxes over a three-year period and may repay all or part of the distribution to the plan or any plan that accepts rollovers no later than the 3rd anniversary of the date of distribution. The allowable timeframe to take a CRD is January 1, 2020 through December 30, 2020.
A qualified individual may designate any eligible distribution as a CRD if the total amount that is designated does not exceed $100,000. It is important to note that a qualified individual may report the distribution as a CRD on their individual tax return even if the plan does not acknowledge the distribution as a CRD.
Coronavirus Loans – The CARES Act modified the rules pertaining to participant loans by allowing loans up to 100% of a qualified individual’s vested account, up to $100,000 (previously limited to 50% and $50,000, respectively). This provision covered loans issued from March 27, 2020 through September 23, 2020. In addition, loan payments due between March 27, 2020 and December 31, 2020 could be delayed up to one year and the five-year maximum loan repayment period was extended by one year.
The IRS recently clarified that only 2020 loan payments are delayed, and repayment, including accrued interest, must begin by the first loan payment due date in 2021. If payments were delayed, and a participant will take advantage of the extended repayment period, the loan must be reamortized from the first payment date in January 2021 to the end of the extended loan term.
Required Minimum Distribution (RMD) – The CARES Act allowed any participant with an RMD due in 2020 from a defined contribution plan to waive their RMD. This includes anyone who turned age 70 ½ in 2019 and would have had to take the first RMD by April 1, 2020 and anyone who would normally take a delayed RMD by April 1, 2021. If an RMD was distributed prior to the enactment of the CARES Act, participants had the ability to roll over the RMD by August 31, 2020. The RMD waiver does not apply to defined benefit plans.
On Friday, June 19, 2020, the IRS released Notice 2020-50 which expanded the definition of a “qualified individual.” The following individuals are now considered qualified individuals:
- The individual, spouse, or dependent has been diagnosed with COVID-19 by an approved test;
- The individual suffered financially from the pandemic due to being laid off or furloughed, being quarantined, having work hours reduced, closing of a business owned by the individual, or being unable to work due to lack of childcare;
- Individuals having a reduction in pay due to COVID-19 or having a job offer rescinded or start date delayed due to COVID-19;
- The individual’s spouse or a member of the individual’s household being quarantined, being furloughed or laid off, having work hours reduced, being unable to work due to lack of childcare, having a reduction in pay, or having a job offer rescinded or start date 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 qualifications, a member of the individual’s household is someone who shares the individual’s principal residence.
Plan administrators can rely on the participant’s self-certification that they qualify for the distribution. The IRS provided a model self-certification that can be found here: irs.gov/pub/irs-drop/n-20-50.pdf.
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