Clarification Issued for Plan Provisions Affected by COVID-19
Amid the COVID-19 pandemic, regulatory bodies and lawmakers enacted several short-term rules that affected employer-sponsored retirement plans and their employees. After careful examination by government agencies, some of those rules required further guidance and clarification. Let’s look at some of those key areas.
On May 4, the IRS posted a series of Q&As that clarified answers to lingering questions about provisions contained in the Coronavirus Aid, Relief and Economic Security (CARES) Act. The Q&As provide the following plan-related clarifications:
- Confirm that the adoption of coronavirus-related distribution (CRD) and loan provisions are optional and at the discretion of the employer
- Confirm that taxes on the CRD may be paid either all at once in the year of distribution or ratably over a three-year period
- Confirm that the last day to obtain a COVID-19 loan with increased limits is September 22, 2020
- Clarify that a qualified individual (more on that definition below) may treat a distribution that meets the necessary criteria to be a CRD, regardless of whether the eligible retirement plan treats the distribution as a CRD
- Clarify that CRDs can be made only from defined contribution plans (such as 401(k) or 403(b) plans) and may not be made from pension plans (such as defined benefit plans and money purchase plans)
Please note: This list is not exhaustive; please refer to the Q&As for a comprehensive collection of topics. On June 19, the IRS issued Notice 2020-50, which provided an expanded definition of who is a "qualified individual" for the purposes of taking a CRD.
According to Notice 2020-50, a qualified individual is anyone who is diagnosed, or whose spouse or dependent is diagnosed, with the virus SARS-CoV-2 or the coronavirus disease 2019 (collectively, “COVID-19”) by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or experiences adverse financial consequences as a result of the individual, the individual’s spouse, or a member of the individual’s household (i.e., someone who shares the individual’s principal residence):
- 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
- Closing or reducing hours of a business they own or operate due to COVID-19
- Having pay or self-employment income reduced due to COVID-19
- Having a job offer rescinded or start date for a job delayed due to COVID-19
Lastly, on June 23, the IRS issued Notice 2020-51, extending the deadline for those who already took a required minimum distribution (RMD) in 2020 from certain retirement accounts (such as a 401(k), 403(b), or IRA). Funds may roll back into a retirement account by August 31, 2020. Originally, the CARES Act RMD waiver deadline to roll funds back into an eligible retirement account was 60 days. This includes account owners who turned 70½ in 2019 and would have had to take the first RMD by April 1, 2020.
With various rule changes and clarifications taking place over the past several months, retirement plan sponsors and administrators are advised to stay up to date with retirement plan regulations and other temporary pandemic-related changes to properly administer their company’s retirement plan. When needed, tap into the expertise of retirement plan service providers, such as third-party administrators and retirement plan advisors, for guidance.