IRS issues guidance on CARES law coronavirus distributions and loans

When the CARES Act was enacted, we written about its provisions which affect pension plans and provide relief to plan sponsors and members. Recently, pursuant to Section 2202 of the CARES Act, the Internal Revenue Service issued Notice 2020-50 on Coronavirus-Related Distributions and Qualifying Pension Plan Loans. Advisory 2020-50 provides guidance to employers on several topics associated with coronavirus-related plan distributions and loans, including the following:

Additional Categories of “Qualified Persons” for Coronavirus-Related Plan Distributions and Lending Purposes

“Qualified persons” are persons eligible under the CARES Act to choose coronavirus-related distributions and loan plans. Opinion 2020-50 extends the definition of “qualified persons” to those who suffer adverse financial consequences as a result of:

  • the person with a pay cut (or self-employment income), a canceled job offer, or a delayed start date of employment due to COVID-19;
  • the spouse or household member of the person quarantined, on leave or laid off, or with reduced working hours due to COVID-19, being unable to work due to lack of on-call ” children due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a canceled job offer or a delayed start date due to COVID-19; Where
  • closing or reducing the hours of operation of a business owned or operated by the individual’s spouse.

A member of an individual’s household is a person who shares the individual’s primary residence.

A plan administrator’s use of certifications and a certification example

A plan administrator can rely on an individual’s certification that they meet the conditions for a qualified individual, unless the administrator has real knowledge to the contrary. The requirement of “real knowledge” does not oblige the administrator to verify whether the individual meets the qualified individual requirements. Instead, the “real knowledge” requirement is limited to circumstances where the administrator already has specific information to determine the reliability of a certification.

Notice 2020-50 provides an example of a notice that can be signed by a person claiming to meet the requirements of a Qualified Person.

Employer Safe Port for Plan Loans

The CARES law provides for a period of one year in the due date for the repayment of a plan loan by a qualified person if the payment of the loan is due between March 27, 2020 and December 31, 2020. The notice 2020-50 provides a safe harbor for qualified employers who suspend the due date of a qualified person’s loan. An employer will be considered to meet the requirements of Code § 72 if:

  • The Eligible Person’s obligation to repay an outstanding loan is suspended for any period beginning no earlier than March 27, 2020 and no later than December 31, 2020 (the “Suspension Period”).
  • Loan repayment must resume after the suspension period ends, and the loan term can be extended up to one year from the original loan maturity date.
  • Interest accrued during the suspension period should be added to the remaining principal of the loan. This requirement is met if the loan is amortized and repaid in substantially uniform installments over the remaining term of the loan (for example, five years from the date of the loan, plus up to one year).
  • If a qualifying employer plan suspends loan repayments during the suspension period, the suspension will not cause the loan to be deemed distributed even if, by reason only of the suspension, the loan term is extended beyond five years.

Qualified persons can designate a distribution as a coronavirus-related distribution

Notice 2020-50 explains that a qualified person is authorized to designate a distribution from a qualifying pension plan that does not exceed $ 100,000 and that is made on or after January 1, 2020 and before December 31, 2020 in as a coronavirus-related distribution the its tax return regardless of the fact that the plan treated the distribution as a coronavirus-related distribution. Likewise, a Qualified Person may designate a qualifying distribution as a coronavirus-related distribution even if the plan is not amended to provide for coronavirus-related distributions.

Employer decisions to change plans to include coronavirus-related distributions and loans

An employer can choose whether or not to modify their plan to provide for coronavirus-related distributions and loans. Advisory 2020-50 explains that, for example, an employer can choose to schedule distributions related to the coronavirus, but also choose not to change their plan’s loan provisions or loan repayment schedules. However, if a plan chooses to include distributions related to coronaviruses, it must be consistent in its treatment of similar distributions.

An employer may choose to treat a qualified person plan distribution as a coronavirus-related distribution. Nonetheless, as explained above, a qualified person could designate a distribution that meets the applicable requirements as a coronavirus-related distribution in their own tax return, even if a plan is not amended to provide for coronavirus-related distributions. .

Distribution limits on coronavirus-related distributions

The total amount of Distributions to a Qualified Person that are treated by an employer as Coronavirus Distributions under all of its pension plans cannot exceed $ 100,000. For the purposes of this rule, “employer” means the employer who maintains the plan and the employers who must be grouped with the employer. However, a plan is sure to meet this requirement if the total of a qualified person’s coronavirus-related distributions exceeds $ 100,000 including distributions from IRAs or other retirement plans maintained by unrelated employers.

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