Additional COVID-19 Relief for Retirement Plan Participants
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law March 27, 2020, provided multiple forms of relief for owners of retirement accounts. The IRS has recently issued additional guidance on these provisions via Notice 2020-50 and Notice 2020-51, providing even further relief for retirement plan participants.
Notice 2020-51: Guidance for Coronavirus-Related Distributions and Loans from Retirement Plans Under the CARES Act
IRS Notice 2020-51 provides additional guidance on the waiver of 2020 Required Minimum Distributions (RMD). Most notably, the IRS has extended the deadline to roll over an RMD amount taken in 2020 until Aug. 31, 2020. For example, if an account owner took the total RMD amount in January 2020, the owner has until Aug. 31, 2020, to recontribute that amount to an eligible retirement account and avoid including the distribution in 2020 income. This expanded rollover window only applies to the RMD portion of a distribution. For example, if a distribution was taken in January 2020 for greater than the total RMD amount for 2020, only the RMD portion is eligible for the expanded rollover period. In addition, such rollover of an RMD amount in 2020 will not count toward the once-per-12-month IRA rollover limitation.
The notice also clarifies that the election to use the five-year rule or life-expectancy rule for RMDs that would have been due by the end of 2020 has been extended by one year (now due at the end of 2021). Similarly, the election to have a direct rollover for a non-spouse beneficiary that would have been due at the end of 2020 is now due by the end of 2021. However, no extension has been provided for Sept. 30 deadline for determining designated beneficiaries, nor has an extension been granted to provide information to plan administrators when trusts are beneficiaries of a plan (still due by Oct. 31.).
Notice 2020-50: Guidance on Waiver of 2020 Required Minimum Distributions
Notice 2020-50 provides additional guidance on “coronavirus-related distributions.” A coronavirus-related distribution is a penalty-free distribution of up to $100,000. The notice expanded the class of individuals that are eligible for a coronavirus-related distribution. Under Notice 2020-50 an eligible individual is anyone who meets any of the following criteria:
- Who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (referred to collectively in this notice as 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) is diagnosed with 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)
- 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 being unable to work due to lack of childcare due to COVID-19; or the closing or reducing hours of a business owned or operated by the individual due to COVID-19
- The individual’s spouse or a member of the individual’s household (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, 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 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
- 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
The IRS further clarified that once an individual becomes eligible for a coronavirus-related distribution, the individual may take any amount up to the maximum regardless of need for funds and the amount need not correspond to the extent of the adverse financial consequence experienced. Additionally, amounts distributed that would have RMDs or periodic payments are eligible to be treated as coronavirus-related distributions (if taken by a qualified individual). Certain distributions, however, are not coronavirus-related distributions, even if taken by a qualified individual. These include, but are not limited to, corrective distributions, loans treated as deemed distributions, dividends paid on applicable employer securities, costs of current life insurance, and health insurance premiums.
The notice also clarifies that the rules for when plan distributions are permitted to be made from employer retirement plans have not changed. For example, a qualified plan that is a pension plan, such as a money purchase pension plan, is not permitted to make a distribution before an otherwise permitted distributable event merely because the distribution, if made, would qualify as a coronavirus-related distribution. Additionally, a plan that does not accept rollover contributions is not required to change its terms nor procedures to accept recontributions of coronavirus-related distributions.
An eligible retirement plan must report a coronavirus-related distribution on Form 1099-R even if the contribution is recontributed to the same plan in the same tax year. If the plan is treating the distribution as a coronavirus-related distribution, and no other appropriate code applies, the payor is permitted to use distribution code 2 in box 7 – although the payor is also permitted to use code 1.
If a coronavirus-related distribution has been included in an individual’s income in a prior year but is recontributed to an eligible retirement plan in a subsequent year, the individual must file an amended tax return and include Form 8915-E to receive a refund of taxes paid on that distribution.
KSM will continue to closely monitor any additional published guidance and provide updates on the impact of the CARES Act on retirement plans. If you have questions related to your specific circumstances, please contact a member of KSM’s Employee Benefit Plan Services Group or complete this form.
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