CARES Act and Your Retirement Plan: UPDATE

CARES Act and Your Retirement Plan:  UPDATE

June 19, 2020, the Internal Revenue Service released Notice 2020-50 expanding the categories of individuals eligible for distributions permitted under The Coronavirus, Aid, Relief, and Economic Security (CARES) Act. 

The notice also provides additional guidance regarding participant self-certification, COVID loan suspensions, and tax treatment of COVID-19 distributions among other helpful and clarifying information. 

Qualified Individuals

Qualifying individuals previously included:

1. 1. 1. Anyone diagnosed with COVID-19,
      2. Anyone whose spouse and /or dependent is diagnosed with COVID-19,
      3. Anyone suffering adverse financial consequences as a result of being quarantined, furloughed, laid off, having reduced work hours due to COVID-19, unable to work due to lack of child care, or the closing or reducing hours of the business owned by the individual due to COVID-19 or any other factor determined by the Treasury Secretary.

Notice 2020-50 provides the following additional qualifying inclusions:

1. 1. 1. Anyone whose job start date is delayed or job offer has been rescinded due to COVID-19,
      2. Anyone whose spouse or member of the individual’s household (i.e. shares the individual’s principal residence) experiences adverse financial consequences as defined above.

Participant Self-Certification

The notice clarifies that plan administrators may rely on an individual’s certification regarding their condition unless the administrator has actual knowledge to the contrary.  While inquiry into whether an individual has satisfied conditions is not an obligation, consideration of requests for relief should take into account information the administrator already possesses that is ‘sufficiently accurate’ to determine the veracity of a certification.

COVID-19 Loan Suspensions

The notice provides a safe harbor regarding loan repayments for participants suspending retirement plan loans due to COVID-19.   Loan repayments must resume after the end of the suspension period (i.e. not later than December 31, 2020) and be re-amortized with interest over the original term of the loan extended by up to 1 year from the date the loan was originally repaid.

In the case of a 5-year loan taken on April 1, 2020, and suspended for the period July 1, 2020, to December 31, 2020, the loan’s term may be extended to March 31, 2026, with repayments recommencing after January 1, 2021.   COVID loan suspensions are permitted for any plan loan with payment due during the period March 27, 2020, through December 31, 2020.

Tax Treatment of COVID-19 Distributions

COVID-19 Distributions may be included in taxable income on federal income tax filings rateable over a 3-year period.   The notice clarifies that there are two methods for a qualified individual to include a coronavirus-related distribution in income:

1. By including the taxable income on 2020, 2021 and 2022 returns rateable over a 3-year period (i.e. 1/3 portion each year) or
2. Electing out of the 3-year ratable income inclusion and include the entire amount of the taxable portion in the year of distribution (i.e. on the 2020 return).

The notice also provides additional information related to taxation when a participant chooses to repay all or a portion of their coronavirus-related distribution.   A series of examples in the notice illustrates a variety of scenarios under which the participant repays all or a portion of their coronavirus-related distribution.   The notice can be accessed here.

For further information related to CARES relief, please contact our office at 216-771-4242.

The information contained in this document is provided for informational purposes only, and should not be construed as advice on the subject matter.