IRS Expands Definition of Qualified Individuals for Purposes of CARES Act Retirement Plan Distributions and Loans
On Friday, June 19, 2020, the Internal Revenue Service released Notice 2020-50 (PDF) to help retirement plan participants affected by COVID-19 take advantage of the CARES Act provisions providing enhanced access to plan distributions and plan loans. Among other provisions, Notice 2020-50 expands the categories of individuals eligible for CARES Act distributions and loan treatment (referred to as "qualified individuals").
Recall that the CARES Act provides that qualified individuals may treat as coronavirus-related distributions (“CRD”) up to $100,000 in distributions made from their eligible retirement plans (including IRAs) between January 1 and December 30, 2020. A CRD is not subject to the 10% additional tax that otherwise generally applies to distributions made before an individual reaches age 59 ½. In addition, a CRD can be included in income in equal installments over the three-year period of 2020, 2021, and 2022, and an individual has three years (from the actual date of distribution) to repay a CRD to a plan or IRA and effectively undo the tax consequences of the distribution.
Also, the CARES Act provides that if a qualified retirement plan offers plan loans, plans may implement certain 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, 2020, and the dollar limit on loans made between March 27 and September 22, 2020, is raised from $50,000 to $100,000.
As expanded under Notice 2020-50, a qualified individual is anyone who:
- Is diagnosed, or whose spouse or dependent 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); 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):
- 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 due to COVID-19 of a business that they own or operate;
- 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- Having a job offer rescinded or start date for a job delayed due to COVID-19.
Notice 2020-50’s expansion of the definition of a qualified individual to include those who experience reductions in wages or self-employment income due to reductions in pay (without necessarily being furloughed or having their hours of work reduced) is a welcome extension of the statutory language. As interpreted by Notice 2020-50, the CARES Act distribution and loan rules will now potentially extend to almost all qualified plan participants who experience work-related pay or income reductions on account of the COVID-19 pandemic.
Notice 2020-50 clarifies that employers can choose to implement these coronavirus-related rules. However, Notice 2020-50 also clarifies that qualified individuals can claim the tax benefits of coronavirus-related distribution rules even if plan provisions are not changed (for example, with respect to minimum required distributions or other permitted distributions). The guidance clarifies that administrators can rely on an individual's certification that the individual is a qualified individual (and the notice quite helpfully provides a sample certification).
Further, Notice 2020-50 provides employers a safe-harbor procedure for implementing the suspension of loan repayments otherwise due through the end of 2020. Under the safe harbor, a qualified retirement plan will be treated as satisfying CARES Act loan provisions if a qualified individual’s obligation to repay a loan is suspended under the plan for any period beginning not earlier than March 27, 2020, and ending not later than December 31, 2020 (the “suspension period”). Loan repayments must resume after the end of the suspension period, and the term of the loan may be extended up to 1 year from the date the loan was originally due to be repaid.
If a qualified retirement plan suspends loan repayments during the suspension period, the suspension will not cause the loan to be deemed distributed even if, due solely to the suspension, the term of the loan is extended beyond 5 years. Interest accruing during the suspension period must be added to the remaining principal of the loan. A plan satisfies these rules if the loan is re-amortized and repaid in substantially level installments over the remaining period of the loan (that is, for non-principal residence loans, 5 years from the date of the loan plus up to 1 year from the date the loan was originally due to be repaid). The Notice also notes that there may be other reasonable ways to administer the loan rules.