The Internal Revenue Service (IRS) has released Notice 2020-50 to help retirement plan participants affected by COVID-19 take advantage of the Coronavirus Aid, Relief and Economic Security (CARES) Act provisions providing enhanced access to plan distributions and plan loans.
With Notice 2020-50, the IRS has expanded the categories of individuals eligible for these types of distributions and loans. Notice 2020-50 also provides guidance and examples for how qualified individuals will reflect the tax treatment of these distributions and loans on their federal income tax filings.
By way of background, the CARES Act provides that qualified individuals may treat as coronavirus-related distributions (CRDs) up to $100,000 in distributions made from their eligible retirement plans between January 1 and December 30. Such coronavirus-related distributions are not subject to the normal 10% excise tax that otherwise generally applies to distributions made before an individual reaches age 59.5.
The CARES Act further provides that plans may implement relaxed rules for qualified individuals relating to plan loan amounts and repayment terms. In particular, plans may suspend loan repayments that are due from March 27 through December 31, and the dollar limit on loans made between March 27 and September 22 is raised from $50,000 to $100,000.
Critically, 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 job start dates.
Notice 2020-50 also allows individuals to take loans or distributions to address such adverse financial consequences experienced by a spouse or household member. Other qualifying factors noted in Notice 2020-50 include being quarantined, furloughed or laid off; having work hours reduced due to COVID-19; being unable to work due to lack of child care due to COVID-19; closing or reducing hours of a business that an individual owns or operates due to COVID-19; and having pay or self-employment income reduced due to COVID-19.
Beyond these developments, 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. The guidance clarifies that administrators can rely on an individual’s certification that the individual is a qualified individual—providing a sample certification—but it also notes that an individual must actually be a qualified individual in order to obtain favorable tax treatment.
Finally, 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.