Under the CARES Act and related Notice 2020-50 issued by the IRS, retirement plan participants affected by COVID-19 can take advantage of enhanced access to plan distributions and loans. Specifically, the following provisions have been provided to qualifying individuals (as defined below):
- Coronavirus-related distributions of up to $100,000 can be made from eligible retirement plans (including IRAs) between January 1, 2020 and December 31, 2020. These distributions are NOT subject to the 10% additional tax that generally applies to distributions made before an individual reaches age 59 ½ nor is the distribution subject to mandatory tax withholding requirements. However, voluntary tax withholding is still permitted. Additionally, coronavirus-related distributions can be included in income in equal installments over a three year period (i.e. as income on 2020, 2021, and 2022 tax returns) rather than taxed fully in the year of distribution. An individual also has three years to repay a coronavirus-related distribution to a plan or IRA to avoid the tax consequences of the distribution. Repayments of coronavirus-related distributions are to be treated as rollover contributions. Even if a plan chooses not to adopt this provision, a qualifying individual may still treat a distribution that meets the requirements as a coronavirus-related distribution on the individual’s federal income tax return.
- Certain loan repayments may be delayed for one year – If a loan is outstanding in an eligible retirement plan (not including IRAs) on or after March 27, 2020, any loan repayments due March 27, 2020 through December 31, 2020 may be delayed for one year. Subsequent repayments will be adjusted to reflect the delay and accrued interest. The plan must adopt this provision in order for it to be applicable.
- Dollar limits on plan loans made between March 27, 2020 and September 22, 2020 may be raised from $50,000 or 50% of vested accrued benefits to $100,000 or 100% of vested accrued benefits. The plan must adopt this provision in order for it to be applicable.
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, as noted above. The guidance clarifies that plan administrators can rely on an individual’s certification that the individual is a qualified individual and provides a sample certification to use (See Notice 2020-50, pgs. 9-10), but also notes than an individual must actually be a qualified individual in order to receive favorable tax treatment. Plan sponsors have until the last day of the first plan year beginning on or after January 1, 2022 (December 31, 2022 for a calendar year plan) to adopt retroactive plan amendments for the distribution and/or loan provisions addressed above.
Qualifying individual is an individual:
- 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 CDC-approved test; or
- who 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):
- 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;
- closing or reducing hours of a business that they own or operate due to COVID-19;
- 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.
Please also see the IRS Q&A on these provisions here. If you have any questions on these provisions, please reach out to a Mitchell Wiggins team member.