UPDATE: Stimulus Bill Provides Relief to Plan Participants
In our March blog post, we discussed the relief provisions for participants in defined contribution plans granted by Congress through the CARES Act, including coronavirus-related distributions (CRDs). The IRS has recently issued Notice 2020-50, which amended the definition of qualified individual (as discussed in our prior blog post) and has provided further guidance on plan and participant treatment of CRDs.
As a recap, qualified individuals can take distributions of up to $100,000 as CRDs between January 1, 2020 and December 31, 2020. Qualified plans may, but are not required to, offer CRDs to participants. These distributions are exempt from the normal 10% early withdrawal penalty, may be repaid over a three-year period if the distribution was eligible for tax-free rollover treatment, and will be treated as income over a 3 year period if not repaid.
The Notice provided guidance on several issues relevant to the treatment of CRDs by plan sponsors. The IRS clarified that the source of a CRD from a defined contribution plan is not limited to just the amounts that are otherwise distributable due to severance from employment, disability, or attainment of age 59 ½. In other words, a plan can permit CRDs to be sourced from elective, qualified nonelective, qualified matching, or safe harbor contributions without the occurrence of any otherwise distributable event. In contrast, CRDs from pension plans can only originate as a result of an otherwise permitted distributable event.
Plan sponsors also received favorable guidance regarding a plan’s acceptance of CRDs. Qualified individuals who receive CRDs that are eligible for a tax-free rollover treatment are permitted to recontribute any portion of the distribution to an eligible retirement plan. The Notice states that a plan’s qualification will not be in jeopardy if that plan accepts a CRD that turns out to be an invalid rollover contribution, so long as (i) the plan sponsor reasonably believed the amount contributed was eligible to be rolled over, and (ii) the plan sponsor distributes the invalid rollover amount plus earnings after determining the contribution was ineligible.
Lastly, the IRS clarified that rules for eligible rollover distributions are not applicable to CRDs. As a result, a plan that treats a distribution as a CRD is not required to: (i) offer the qualified individual a direct rollover with respect to the distribution; (ii) provide a 402(f) notice; or (iii) withhold 20% of the distributions. CRDs are instead subject to 10% withholding, unless the individual elects to have withholding not apply.
The Notice also provided guidance directed toward plan participants. The IRS clarified that a qualified individual that is permitted to take CRDs can take distributions up to the $100,000 limit, regardless of whether COVID-19 caused a need of funds equal to or greater than the distribution (i.e., CRDs do not have to directly tie to the adverse financial effects caused by COVID-19). In addition, plan participants may treat certain distributions as CRDs, regardless of how those distributions are treated by the plan (including participants of plans that do not offer CRDs). The Notice specifically states that individuals can treat RMDs, qualified plan loan offsets, and distributions received as a beneficiary as CRDs, while other distributions, such as corrective distributions of elective deferrals and loans that are treated as deemed distributions, cannot be treated as a CRD.
If you have questions regarding CRDs or any other benefit issues, please reach out to any of Graydon’s employee benefits attorneys.