In Notice 2020-50, the IRS recently provided guidance on “coronavirus-related distributions” from retirement plans under Section 2202 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Here are some pertinent details for employers.
The Notice points out that Sec. 2202 doesn’t change the rules for when plan distributions are permitted to be made from employer retirement plans. Thus, a qualified pension plan isn’t permitted to make a distribution before an otherwise permitted distributable event merely because the distribution, if made, would qualify as coronavirus-related.
Further, a pension plan isn’t permitted to make a distribution under a distribution form that isn’t a qualified joint and survivor annuity without spousal consent merely because the distribution, if made, could be treated as coronavirus-related.
Distribution and withholding rules
If a distribution is treated as coronavirus-related by an employer’s retirement plan, the rules for eligible rollover distributions under the Internal Revenue Code (IRC) aren’t applicable to the distribution. Thus, the plan isn’t required to offer the qualified individual a direct rollover with respect to the distribution. The plan administrator also isn’t required to provide a Sec. 402(f) notice.
In addition, the plan administrator or payor of the coronavirus-related distribution isn’t required to withhold an amount equal to 20% of the distribution, as is usually required. However, a coronavirus-related distribution is subject to voluntary withholding requirements.
Under the CARES Act, the total amount of distributions treated by an employer as coronavirus-related under its retirement plans with respect to a qualified individual cannot exceed $100,000. For purposes of this rule, the term “employer” means the employer maintaining the plan and those employers required to be aggregated with the employer under the IRC.
A plan won’t fail to satisfy any requirement of the IRC merely because a qualified individual’s total coronavirus-related distributions exceed $100,000, including distributions from IRAs or other eligible retirement plans maintained by unrelated employers.
An employer may choose whether, and to what extent, to treat distributions under its plans as coronavirus-related. So, for example, an employer may choose to provide for these distributions but choose not to change its plan loan provisions or loan repayment schedules.
The employer (or plan administrator) is permitted to develop any reasonable procedures for identifying which distributions are treated as coronavirus-related under its retirement plan(s). However, if, under an employer retirement plan, any distribution of an amount subject to the IRC is treated as coronavirus-related, the plan must be consistent in its treatment of similar distributions.
The amount of the distribution must be considered in determining the $100,000 limit on coronavirus-related distributions made under the employer’s retirement plan(s). Even if a distribution isn’t treated as eligible under a plan, a qualified individual may treat a distribution that meets the coronavirus-related distribution requirements as eligible on his or her federal income tax return.
These are just a few of the key points made in Notice 2020-50. Our firm can provide further information.