By Greta Cowart
After the CARES Act was enacted, plan administrators had questions regarding how to determine if a participant is eligible to receive a Coronavirus distribution, Coronavirus loan, or delay of loan payments because a distribution to a participant that fails to meet the requirements could put the plan at risk. The CARES Act also permitted the Internal Revenue Service to further define the qualification requirements for this relief.
Employers also had concerns related to whether participants could access funds in nonqualified deferred compensation plans related to hardships arising from the Coronavirus pandemic. The IRS issued Notice 2020-50 on Friday, June 19 resolving some of the issues perplexing employers under the CARES Act.
The Notice expanded the definition of which individuals are eligible for the CARES Act retirement plan relief as Coronavirus distributions, Coronavirus loans, and loan payment suspension to include not only the first six reasons below, but also the three additional items listed in 7-9. A “qualified individual” is a person described in 1 through 9 below.
- The individual is or has been quarantined, furloughed or laid off or having hours reduced due to COVID-19;
- The individual is unable to work due to lack of childcare due to COVID-19;
- Closing or reducing hours of a business owned or operated by the individual due to COVID-19;
Or, a participant who experiences adverse financial consequences as a result of either:
- The individual is or has been quarantined, furloughed or laid off, or has work hours reduced due to COVID-19;
- The individual is 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.
In addition, an individual who meets one of the following three requirements is also a “qualified individual”:
- The individual having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or a start date for a job delayed due to COVID-19;
- The individual’s spouse or a member of the individual’s household (as defined below) 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childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or a start date for a job delayed due to COVID-19; or
- Closing or reduction in hours of a business owned or operated by the individual’s spouse or a member of the individual’s spouse or a member of the individual’s household due to COVID-19.
An individual is a member of a participant’s household if such individual shares the participant’s principal residence.
The individual receiving a Coronavirus distribution may designate the distribution as a Coronavirus distribution even if the plan does not designate it as such. The Notice designates certain distributions that cannot be Coronavirus distributions.
The Notice clarifies that:
- The Coronavirus distributions do not need to be withdrawn solely to meet a need arising from COVID-19;
- The Coronavirus distributions are permitted without regard to the qualified individual’s need for the funds; and
- The amount of the distribution is not required to correspond to the extent of the adverse financial consequences experienced by the qualified individual.
Pension plans cannot permit Coronavirus distributions unless the participant otherwise has a distributable event that permits a distribution.
An employer or plan administrator is permitted to rely on a participant’s certification regarding his or her eligibility for a Coronavirus distribution unless the plan administrator has actual knowledge to the contrary. A plan administrator is not required to inquire or investigate whether the individual meets the requirements to be a qualified individual. A plan administrator may rely on an individual’s certification to make and report a distribution. The individual may only treat a distribution as a Coronavirus distribution on his or her individual income tax return if he or she actually meets the eligibility requirements to be a “qualified individual.”
The Notice also included guidance on a form participant certification, reporting, and re-contribution requirements and individual income tax consequences of receiving a Coronavirus distribution.
The expanded definition of a qualified individual also applies to determine who may take a Coronavirus loan from March 27, 2020, through December 31, 2020, up to the Coronavirus loan limit of $100,000. Employers are not required to adopt the Coronavirus loans.
Participant Loan Payment Delay for Qualified Individuals
Such qualified individuals are also the same group who are eligible to suspend loan payment on loans that are outstanding from a retirement plan at any time on or after March 27, 2020 for payments due after such date and before December 31, 2020. A qualified individual can request such participant loan payments be delayed for one year, but if such payments are delayed when they are paid one year later the amount of the payment must be adjusted for the interest from the date of the original payment due date to the date of the delayed payment due date. The period of the delay in payments is disregarded when calculating whether the loan is repaid within the maximum loan duration of 5 years. The loan may be extended up to one year from the date it was originally due to be repaid. If the loan payments are delayed, the loan must be re-amortized and repaid in substantially level installments over the remaining period of the loan (the remaining period is limited to the original maximum period of up to 5 years plus up to 1 year for the Coronavirus delay from the original repayment date). Employers are not required to adopt the loan payment delay, but may choose to do so.
Coronavirus and Nonqualified Deferred Compensation Plans
A qualified individual who takes a Coronavirus distribution under the employer’s qualified retirement plan will be permitted to cancel his or her deferral election under a nonqualified deferred compensation plan as the result of the individual taking a Coronavirus distribution in the same way as such deferral could have been ceased if the individual had taken a hardship withdrawal from a 401(k) plan. However, the deferral election must be cancelled and it may not merely be postponed or otherwise delayed.
Greta E. Cowart has counseled employers for more than 30 years on best practices in human resources and employee relations issues related to benefits and executive compensation. In her practice, Greta routinely develops strategies for effective administration of claims and other disputes, including defense of grievances, and in litigation considering implications under ERISA, while also considering applicable labor and employment laws. Greta also provides fiduciary training and review of fiduciary operations to improve the documentation of the fiduciary process. Greta is a former chair of the Employee Benefits Committee of the ABA Section of Taxation, and has served on the U.S. Department of Health and Human Services CHIP Working Group.
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