IRS Guidance Expands Retirement Plan Relief (COVID-19 Alert)
Last Friday's guidance in IRS Notice 2020-50 expands the definition of "Qualified Individuals" entitled to retirement plan relief under the CARES Act and verifies that employer implementation of the relief rules is not required. The highlights are outlined below.
DEFINITION OF QUALIFIED INDIVIDUALS
Qualified Individuals as defined in the CARES Act included individuals who personally suffer adverse financial consequences as a result of the COVID-19 pandemic.
Notice 2020-50 expands the definition:
- to include adverse financial consequences arising from the impact of the pandemic on an individual's spouse or a member of the individual's household (that is, someone who shares the individual's principal residence), and
- to take into account additional pandemic related financial factors including reduction in pay, rescission of job offers, and delayed job start dates.
"PERMITTED, BUT NOT REQUIRED"
The tax benefits of the CARES Act retirement plan distribution provisions can be claimed by Qualified Individuals even if the employer does not change plan provisions to permit such distributions.
This is because a qualified retirement plan is "permitted, but not required" to treat a qualifying distribution as a COVID-19-related distribution. Accordingly, almost all retirement plan distributions to Qualified Individuals during 2020 will be exempt from the ten percent tax on early distributions; will be eligible for taxation over a three year period; and can be rolled over (including hardship distributions and required minimum distributions that generally cannot be rolled over).
WHAT EMPLOYERS NEED TO KNOW
Employers who sponsor qualified retirement plans need to consider whether or not to make plan changes to implement CARES Act relief provisions. Because it is now clear that participants will be able to take advantage of the relief provisions on their own, some employers may want to avoid the administrative complication of providing separate distribution provisions that may apply to only a portion of their workforce (the Qualified Individuals).
Other employers may want to make sure that their employees are advised of their CARES Act relief rights under participant disclosures that would be required if they choose to amend their retirement plan. In either case, current participant distribution notices (known as "402(f) notices") are incomplete and potentially misleading.
Because IRS Notice 2020-50 provides that 402(f) notices are not required for coronavirus-related distributions treated as such by an employer plan, employers that choose to amend their plans should stop using their current 402(f) notices for such distributions. Other employers may want to supplement their current 402(f) notices to describe the new CARES Act rules.
WE CAN HELP
Golan Christie Taglia is available to assist with any questions or concerns that you may have about the impact of this most recent change, or any of the other benefit relief provisions available through the CARES Act as outlined in our prior benefit alerts. For additional details or to discuss your particular situation, please feel free to contact: