In-Depth: COVID-19 Related IRS Notices

Supplement to IRS CARES Act Retirement Plan Guidance (Barack Ferrazzano Client Alert, July 2020)

IRS Notice 2020-50

One of the ways in which the CARES Act attempts to relieve some of the financial burden of the COVID-19 crisis is by permitting plan sponsors to allow early access to plan funds through expanded plan loans and “coronavirus-related” hardship distributions. The plan loan limitations established under the Internal Revenue Code (the “Code”) have increased from $50,000 to $100,000 (or, if less, 100% of the vested account balance) through September 20, 2020, and certain plan loan payments due in 2020 may be suspended for up to one year. In addition, coronavirus-related hardship distributions of up to $100,000 can be made from retirement plans (and IRAs) during 2020 without such distributions being subject to the 10% additional tax that otherwise generally applies to distributions made before an individual reaches age 59½. Also, the distributions are eligible for repayment to the retirement plan (or IRA) for up to three years from the date of the distribution, in which case the tax consequences of the distribution are undone.

With respect to plan loans, Notice 2020-50 establishes a safe harbor for plan sponsors who will amend their plans to include the CARES Act loan repayment suspension. The safe harbor provides:

1. The suspension can apply to any plan loan outstanding on or after March 27, 2020, with a due date(s) scheduled between March 27, 2020 and December 31, 2020.
2. The repayment obligation resumes after the end of the suspension period (which cannot be later than January 1, 2021) and the term of the loan may be extended by up to one year from the original due date.
3. Interest must accrue during the suspension period and must be repaid over the term of the loan (plus the one year extension).

With respect to coronavirus-related distributions, Notice 2020-50 explains that a distribution:

1. is not subject to the 10% additional tax under Section 72(t) of the Code (including the 25% additional tax under Section 72(t)(6) for certain distributions from SIMPLE IRAs);
2. generally is includible in income over a three-year period; and
3. to the extent the distribution is eligible for tax-free rollover treatment and is contributed to an eligible retirement plan within a three-year period, will not be includible in income.

In addition, Notice 2020-50 expands the group of individuals who may qualify (assuming amendment of the plan by the plan sponsor) for coronavirus-related hardship distributions or plan loan relief to include:

1. participants (and beneficiaries), their spouses or dependents diagnosed with COVID-19; or
2. participants (and beneficiaries), their spouses or members of their household (i.e., someone who shares the principal residence), who experience adverse financial consequences as a result of quarantine, furlough, lay-off, rescinded or delayed job offers, reduction in hours or pay, or inability to work due to lack of childcare.

The Notice includes a sample certification that can be used by plan administrators. Plan administrators can rely on the certification absent actual knowledge to the contrary and have no duty to inquire about satisfaction of these conditions.

IRS Notice 2020-51

Another way in which the CARES Act has attempted to alleviate some of the financial burdens associated with the COVID-19 crisis is by permitting the suspension of required minimum distributions (“RMDs”) in 2020. The general idea underlying this suspension is that assets should not be forced out of plans at a time when they might have lost significant value due only to the impact of the COVID-19 crisis on plan investments.

Generally, RMDs must be taken each year beginning upon the participant’s or IRA owner’s attainment of age 72, unless such individual continues in employment beyond age 72. In general, IRA and retirement plan beneficiaries are also subject to RMDs.

Notice 2020-51: (1) allows individuals who have already taken RMDs in 2020 to roll those funds back into a retirement account (with the 60-day rollover period available until August 31, 2020); (2) addresses questions relating to the waiver of 2020 RMDs; and (3) provides a sample plan amendment under which individuals may choose whether to receive waived RMDs. Before adopting any plan amendment, we recommend that plan sponsors consult with their legal counsel.

IRS Notice 2020-52

A third Notice recently issued by the IRS, while not specifically relating to the CARES Act, is intended to provide plan sponsors with guidance about, and relief with respect to certain requirements applicable to, mid-year reductions or suspensions of “safe harbor” contributions. Notice 2020-52 recognizes the need for temporary relief because of the widespread COVID-19-related economic challenges facing plan sponsors.

Under Notice 2020-52, in order to suspend safe harbor matching or nonelective contributions mid-year, a plan sponsor generally must: (1) be operating at an economic loss; or (2) have timely notified employees, prior to the start of the plan year, that (A) the plan might be amended to suspend safe harbor contributions during the coming plan year, and (B) that any such suspension would not apply until 30 days after a mid-year supplemental notice is given.

In addition, the Notice provides that plan sponsors who adopt or have adopted, between March 13, 2020, and August 31, 2020, an amendment to suspend or reduce safe harbor matching or nonelective contributions, will not be considered to have violated the economic loss or pre-plan year notice requirements described above. Further, the Notice provides temporary relief for plan sponsors who have amended or do amend their plans for a mid-year reduction or suspension of nonelective contributions (but not with respect to matching contributions), without providing a supplemental notice to employees at least 30 days before the reduction or suspension, so long as the supplemental notice is actually provided to employees by August 31, 2020.

Finally, Notice 2020-52 provides further clarity about mid-year amendments to reduce certain contributions to highly compensated employees (“HCEs”). In general, a reduction or suspension of safe harbor contributions for only HCEs is not treated as an impermissible reduction or suspension, because contributions on behalf of HCEs are not included in the definition of a safe harbor contribution under the Code. Nevertheless, the Notice clarifies that notice to HCEs of a reduction or suspension is still required, and a new deferral election opportunity must be given to such HCEs.