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IRS Provides Additional Guidance on CARES Act Retirement Plan Distributions and Loans

On June 19, 2020, the IRS issued Notice 2020-50, which provides additional guidance pertaining to coronavirus-related distributions and qualified plan loans made pursuant to the CARES Act enacted on March 27, 2020, as well as deferral elections made with respect to nonqualified deferred compensation plans for the 2020 calendar year [see legal update]. Please note that the CARES Act is a new law and agency guidance continues to be issued. Therefore, you may want to seek advice of counsel with respect to these issues.

Coronavirus-Related Distributions

The CARES Act permits certain qualified individuals to receive favorable tax treatment with respect to coronavirus-related distributions from eligible retirement plans. The CARES Act defined "qualified individual" as anyone who:

  • Self-certifies that they, or their spouse or dependent, were diagnosed with COVID-19; or

  • Experienced an "adverse financial consequence" as a result of being:

  • quarantined, furloughed, laid off, or having a reduction in hours;

  • unable to work due to lack of childcare; or

  • unable to work because their business was forced to close or reduce hours.

The IRS guidance now clarifies an "adverse financial consequence" may also occur because of any of the following as a result of COVID-19:

  • The individual experiences a reduction in pay, recision of a job offer, or a delayed start date;

  • The individual's spouse or someone who shares the individual's principal residence is quarantined, furloughed, laid off, has reduction in hours or pay, is unable to work due to lack of childcare, or has a recision of a job offer or delayed start date; or

  • A business owned/operated by the individual's spouse or member of their household must close or reduce their hours.

Additionally, the IRS guidance clarifies amounts that are not eligible rollover distributions cannot be treated as coronavirus-related distributions, including: excess deferral refunds, deemed distributions resulting from loan defaults, and permissible withdrawals from an eligible automatic contribution arrangement.

Plan Loans

The CARES Act permits qualified plans to suspend loan repayments due through the end of 2020. The IRS Notice implements a safe harbor for those qualified plans that permit the suspension of a participant's loan for any period beginning not earlier than March 27, 2020 and ending not later than December 31, 2020. Under the safe harbor, the term of the loan may be extended for one year from the date the loan was originally due to be repaid in full. The IRS guidance provides an example wherein a loan set to be fully repaid on March 31, 2025 is extended to March 31, 2026 as a result of the participant's loan repayments being suspended for part of the 2020 plan year (from July 1, 2020 to December 31, 2020) falling within the safe harbor period.

Option to Cancel Deferrals to Nonqualified Deferred Compensation Plans

Employers sponsoring a nonqualified deferred compensation plan may permit a service provider to cancel their deferral election if such cancellation is made due to an unforeseen emergency or hardship distribution. Specifically, if a participant receives a coronavirus-related distribution from an eligible retirement plan, that distribution is considered a hardship distribution permitting the cancellation of a deferral election.

Other Provisions

The IRS Notice also provides additional information with respect to reporting of coronavirus-related distributions, a sample self-certification statement, and information relevant to taxpayers reporting such distributions. 

Copyright © 2020 Robinson & Cole LLP. All rights reserved.National Law Review, Volume X, Number 176

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About this Author

Bruce Barth Benefits lawyer Robinson Cole
Partner

Bruce Barth, chair of the firm's Labor, Employment, Benefits + Immigration Group, as well as the firm’s Employee Benefits + Compensation Team, focuses his practice on the representation of employers and fiduciaries with respect to retirement and welfare benefits, executive compensation, and benefits issues in corporate transactions.

Employee Benefits

Bruce advises clients on the implications of tax, securities, labor, and other laws, including the Employee Retirement Income Security Act (ERISA). Drawing from over 30 years of employee...

860.275.8267
Virginia E. McGarrity Benefits lawyer Robinson Cole
Partner

Virginia McGarrity is a member of the firm's Employee Benefits + Compensation Group, counseling employers, insurance carriers, and service providers on a wide range of complex employee benefits and executive compensation matters.

Retirement Plan Design and Administration

Virginia’s practice addresses a broad array of issues relating to the design, drafting, and operation of qualified and nonqualified defined benefit and defined contribution plans, including 401(k), profit-sharing, multiemployer, employee stock ownership and Section 403(b) and 457(b) plans of tax-exempt organizations. She represents clients before the Internal Revenue Service, the Department of Labor, and the Pension Benefit Guaranty Corporation in connection with audits, qualification submissions, plan corrections, and other matters.

Governmental Plans

Virginia frequently works with state and municipal governmental clients sponsoring and administering benefit plans and programs. She advises these clients on qualified retirement plans and 457(b) plans, from generally applicable requirements to unique rules addressing vesting requirements for governmental plans, pick-up of employee contributions, purchase of service and 415(m) excess plans. Additionally, she advises clients on state statutes relating to the implementation and governance of public plans, as well as the interpretation of specific enabling statutes creating various governmental entities.

860.275.8291
Alisha Sullivan Employment lawyer Robinson Cole
Associate

Alisha Sullivan is a member of the firm's Employee Benefits + Compensation Group. She focuses her practice on counseling a wide range of clients on issues arising from the creation and administration of employee benefit plans, including all aspects of plan design and administration, adhering to ERISA, the Internal Revenue Code, and other applicable laws, and plan compliance and correction issues.

Retirement Plan Design and Administration

Alisha's practice addresses a broad array of issues relating to the design, drafting, and operation of qualified and...

860.275.8360