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More Caring: New CARES Act Guidance For Retirement And Nonqualified Plans

In the ongoing effort to help individuals impacted by COVID-19, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) relaxed distribution and loan rules to provide participants with greater access to their retirement plan funds. The CARES Act also suspended 2020 required minimum distributions for eligible defined contribution plans. Click here for more details about retirement plan provisions in the CARES Act.


New Internal Revenue Service (IRS) guidance expands the availability of CARES Act distributions and loans under eligible retirement plans, and it provides important clarifications regarding how to administer and report CARES Act distributions and loans. The guidance also provides welcome relief for a participant who receives a CARES Act distribution, allowing the participant to revoke an otherwise irrevocable salary deferral election under a nonqualified deferred compensation plan. Finally, consistent with prior guidance, the new IRS guidance confirms that CARES Act provisions are optional, meaning that plan sponsors may choose whether to implement CARES Act changes.

Expanded Availability for Distributions and Loans Under CARES Act

The new guidance expands the definition of a “qualified individual,” who is eligible to receive a coronavirus distribution (covered distribution) or loan under the CARES Act. In addition to the statutory definition in the CARES Act, a qualified individual now also includes an individual who experiences adverse financial consequences from COVID-19 as a result of any of the below:

  • The individual’s reduction in pay, or a delayed or rescinded job offer or start date.

  • The individual’s spouse, or a person who shares the individual’s principal residence, undergoes: (i) a quarantine, furlough, layoff or reduced work hours; (ii) a work reduction due to lack of childcare, or (iii) a reduction in pay, or a delayed or rescinded job offer or start date.

  • The individual’s spouse, or a person who shares the individual’s principal residence, operates or owns a business that closes or reduces hours.

  • In assessing who is a qualified individual under the CARES Act, the plan administrator may rely on an individual’s self-certification, unless the administrator has actual knowledge to the contrary. In addition, the IRS guidance provides a sample of a self-certification for a qualified individual.

  • The new guidance also clarified that a qualified individual under the CARES Act may include a beneficiary. However, a beneficiary may not repay a covered distribution.

More Clarity for Covered Distributions Under CARES Act

The new IRS guidance clarifies administration of covered distributions for eligible retirement plans made through December 30, 2020 (covered distributions cannot be made on and after December 31, 2020). As a reminder, the CARES Act permits a covered distribution of up to $100,000 for “qualified individuals” affected by COVID-19, without application of the 10% early distribution penalty. In addition, a participant who receives a covered distribution may include the distribution in taxable income ratably over three years.

In administering covered distributions, the new guidance indicates that plan administrators are not required to: (i) provide a 402(f) distribution notice with a covered distribution; (ii) ensure that the amount of the covered distribution corresponds to the qualified individual’s need for funds; and (iii) accept repayment of covered distributions, unless the plan generally accepts rollover contributions. However, in assessing whether the maximum $100,000 limit for covered distributions is reached, a plan administrator isrequired to aggregate all retirement plans maintained by affiliates within its controlled group of employers. For tax reporting purposes, the new guidance also clarifies the following for plan administrators.

  • The plan applies only voluntary tax withholding, rather than the 20% mandatory withholding.

  • The plan must report a covered distribution on Form 1099-R even if the qualified individual repays the covered distribution in the same year.

  • Although the 10% early withdrawal penalty does not apply to a covered distribution, the plan is permitted to use either Code 2 (early distribution, exception applies) or Code 1 (early distribution, no known exception) for Form 1099-R reporting.

  • The plan does not treat a covered distribution as a change in other substantially equal periodic payments, for purposes of applying the exception to the 10% early distribution tax on such periodic payments.

More Guidance for Loan Suspensions Under CARES Act

For defined contribution plans, the CARES Act enacted special loan rules that may apply to new loans issued during March 27, 2020, through September 22, 2020 (CARES Act loans cannot be made on or after September 23, 2020). A new CARES loan may be up to $100,000 and 100% of the qualified individual’s account balance. In addition, for new and existing loans, the CARES Act allows a plan to suspend any loan repayment due between March 27, 2020, and December 31, 2020. The new guidance creates a safe harbor method for such loan suspension. Under the safe harbor method, plan loan repayments must resume in January 2021. The plan also may extend the loan term by up to one year, even if this extension means the maximum loan period exceeds five years. The loan balance and future payments must be reamortized and adjusted for interest during the loan suspension period. Although the IRS indicated that other loan suspension methods may be reasonable and permissible, the safe harbor is likely the CARES loan methodology that most plans will implement for administrative ease and to ensure level loan repayment amounts for qualified individuals in 2021.

More Lucidity on 2020 Required Minimum Distributions Under CARES Act

The CARES Act waived the 2020 required minimum distribution (RMD) payments at age 70½ from defined contribution plans and IRAs. This optional relief allows participants to delay RMD payments and avoid taking a distribution while the value of their retirement plan investments is significantly reduced. Recent IRS guidance provides that participants, who receive 2020 RMD payments, can roll them into an eligible retirement plan, including the original distributing plan. Specifically, the following types of two types of distributions may be rolled into an eligible retirement plan.

  • RMD payments paid in 2020 that equal the 2020 pre-CARES RMD payment amounts, regardless of whether the payments are part of substantially equal period distributions.

  • RMD payments paid in 2021 for participants with a required beginning date of April 1, 2021, but only if such participant first receives amounts equal to 2021 RMD payments.

For plan participants who already received RMD payments in 2020, the IRS extended the 60-day rollover and repayment periods to August 31, 2020, for both defined contribution plans and IRAs, including an inherited IRA.

Participant Relief for Nonqualified Deferred Compensation Plan

The tax code generally requires that a participant make an irrevocable salary deferral election to a nonqualified deferred compensation plan for the upcoming year. Despite all of the relief included in the CARES Act, the CARES Act did not include any specific provisions that allowed a participant to cancel a salary deferral election under a nonqualified deferred compensation plan due to COVID-19. Even if a participant was a qualified individual with a covered distribution, the CARES Act did not seem to allow a participant to cancel a salary deferral election under a nonqualified deferred compensation plan, unless the participant met the more strenuous rules for an unforeseeable emergency under a nonqualified deferred compensation plan or for a hardship distribution under a defined contribution plan.

The recent IRS guidance provides new relief for qualified individuals in nonqualified deferred compensation plans. If a participant receives a covered distribution from an eligible retirement plan, then the nonqualified plan correspondingly may permit such individual to cancel an otherwise irrevocable salary deferral election to a nonqualified deferred compensation plan.

Plan Amendments for CARES Act

The new guidance indicates that all defined contribution plans will be treated as operating in accordance with the CARES Act, as long as the plan sponsor amends the plan by the CARES Act deadline. For any defined contribution plan that implements CARES Act loans, covered distributions or RMD changes, the plan must be amended by the end of the 2022 plan year. However, if a nonqualified deferred compensation plan currently does not permit cancellation of a salary deferral election for a hardship distribution under a defined contribution plan, then the nonqualified plan will require an amendment before cancellation of such election for a covered distribution.

© 2021 McDermott Will & EmeryNational Law Review, Volume X, Number 189



About this Author

Diane M. Morgenthaler, Corporate Tax Planning Attorney, Retirement Plans for Companies, McDermott Will Emery, Chicago Law Firm

Diane M. Morgenthaler focuses her practice on employee benefits and executive compensation. She represents clients in matters before the US Internal Revenue Service, the Department of Labor and the Pension Benefit Guaranty Corporation.

Diane serves as employee benefit counsel to Fortune 500 corporations and other global corporations, and represents both public and private clients. She regularly designs and implements a variety of employee benefit plans and programs. Diane has extensive experience in employee benefit issues involved in...

Joshua Lerner, McDermott, employment lawyer

Joshua N. Lerner focuses his practice on a variety of executive compensation, employee benefits, corporate governance and securities matters. He has experience advising public and private companies and individual senior executives on executive compensation and benefits matters in a range of corporate transactions and in a regular advisory role. Joshua also counsels clients on ongoing public company matters, including their Securities Exchange Act of 1934 reports and corporate governance and disclosure compliance, and has experience advising clients on a wide range of equity-based incentive...

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Sarah Engle* is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office. She focuses her practice on employee benefits matters.

Sarah counsels clients regarding a variety of employee benefits matters, including the design, drafting and operation of tax-qualified pension and profit sharing plans, health and welfare arrangements, and deferred compensation plans.

She is experienced advising clients on employee benefits design, implementation and transition matters arising in...

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