On June 19, 2020, the Internal Revenue Service (IRS) issued Notice 2020-50, which expands the categories of "qualified individuals" eligible to take coronavirus-related distributions and loans from certain retirement plans under Section 2202 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Notice 2020-50 also provides a safe harbor procedure for the delay of retirement plan loan repayments authorized under the CARES Act. The expanded definition of “qualified individuals” takes into account reductions in pay, rescissions of job offers, delayed job start dates, and adverse financial consequences on an individual’s spouse or household member as a result of the COVID-19 pandemic. This guidance helps employers, plan administrators, trustees, custodians, and qualified individuals understand how to make retirement funds available to qualified individuals and how to treat coronavirus-related distributions for federal income tax purposes.
The CARES Act authorizes the IRS to widen the scope of individuals experiencing adverse financial consequences as a result of COVID-19 who may be considered qualified individuals. A broader summary of coronavirus-related distributions and the expanded retirement plan loan availability under the CARES Act is available here.
Expansion of “Qualified Individuals”
For purposes of the CARES Act and as expanded by Notice 2020-50, a “qualified individual” is an individual who:
- is diagnosed, or whose spouse or dependent is diagnosed, with the virus SARS-CoV-2 or the coronavirus disease 2019 (together, COVID-19) by a test approved by the CDC; or
- experiences adverse financial consequences as a result of the individual, individual’s spouse or member of the individual’s household (defined as someone who shares the individual’s principal residence):
- being quarantined, furloughed, or laid off;
- 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;
- having a job offer rescinded or start date for a job delayed due to COVID-19; or
- closing or reducing hours of a business that he or she owns or operates due to COVID-19.
This expanded definition permits a larger group of retirement plan participants to take advantage of the CARES Act provisions that provide enhanced access to plan distributions and plan loans, as well as the suspension of plan loan repayments.
Plan Participant Certification
Notice 2020-50 also provides a sample certification for a plan participant to attest that he or she is a qualified individual. Although the Notice does not explicitly require a written certification, the sample certification contains a signature line, which may indicate the IRS’s preference for a written, signed certification. The IRS emphasized that plan administrators may rely on the participant’s certification, unless the administrator has actual knowledge to the contrary, and that the administrator has no obligation to investigate whether a participant has satisfied the conditions to be a qualified individual.
Safe Harbor Procedure for Suspension of Loan Repayments
Notice 2020-50 outlines a safe harbor procedure for suspending the loan repayments otherwise due through the end of 2020, although the IRS notes that there may be additional reasonable ways to administer these rules. Under the safe harbor, a qualified employer plan will be treated as satisfying the plan loan repayment requirements in accordance with Section 72(p) of the Internal Revenue Code of 1986, as amended (the Code), if:
- a qualified individual’s obligation to repay a plan loan is suspended under the plan for any period beginning on or after March 27, 2020, and ending on or before December 31, 2020 (the “suspension period”);
- the loan repayments resume after the end of the suspension period, although the term of the loan may be extended by up to one year from the date the loan was originally due to be repaid;
- interest accruing during the suspension period must be added to the remaining principal of the loan; and
- the loan is reamortized and repaid in substantially level installments over the remaining period of the loan (i.e., five years from the date of the loan, unless the loan is a principal residence loan, plus one year from the date the loan was originally due to be repaid).
Employers are permitted to choose whether, and to what extent, to apply coronavirus-related plan loan rules, but the safe harbor procedure provides clarity to employers on an allowable method of suspending loans under the CARES Act while complying with Section 72(p) of the Code.
If you have any questions about this legal update, please reach out to the MMM Employee Benefits & Executive Compensation Team.