irs guidance

IR-2020-215 announces a tax filing and payment deadline extension for certain persons and businesses affected by recent wildfires and straight-line winds Oregon.

The IRS has published a notice offering the opportunity to comment on proposed changes to the information the agency collects on Form 5500, Form 5500-SF, and Form 5500-EZ.

The IRS has issued Notice 2020-68, guidance in question-and-answer (Q&A) format on provisions of legislation enacted in December 2019 in the SECURE Act.

The IRS has issued Revenue Procedure 2020-40, which makes a minor modification to Revenue Procedures 2016-37 and 2019-39.

The IRS has released a notice of proposed rulemaking that takes into account changes made by the TCJA related to rollover rules for qualified plan loan offset (QPLO) amounts.

In Announcement 2020-14, the IRS provides advance notice of fee increases for certain determination applications, effective January 4, 2021.

The IRS has released two Notices with more guidance for certain provisions under the CARES and SECURE Acts.

The IRS has issued Notice 2020-52, guidance that provides sponsors of 401(k) and 403(b) safe harbor plans limited relief from certain otherwise-applicable requirements for mid-year suspension or reduction of safe harbor matching or nonelective contributions.

Notice 2020-52’s temporary relief is being granted as a consequence of the widespread economic challenges facing employers as a result of the coronavirus (COVID-19) pandemic.

Requirement for Mid-Year Suspension of Safe Harbor Contributions

In order to suspend safe harbor matching or nonelective contributions mid-year, a sponsoring employer generally must meet one of the following requirements. 

• The employer must be operating at an economic loss.
• The employer must have given employees timely notice prior to the start of the plan year that the plan might be amended to suspend safe harbor contributions during the coming plan year, and that such suspension would not apply until 30 days after a mid-year supplemental notice is given.

Temporary Relief for Mid-Year Reduction or Suspension of Safe Harbor Contributions

Employers that adopt or have adopted between March 13, 2020, and August 31, 2020, an amendment to suspend or reduce 401(k) or 403(b) safe harbor matching or nonelective contributions, will not be considered to have violated the economic loss or pre-plan year notice requirements described above.

Temporary Relief for Nonelective Contribution Supplemental Notice

Notice 2020-52 also provides temporary relief for employers that amended or amend their plans for a mid-year reduction or suspension of nonelective contributions, without providing a supplemental notice to employees at least 30 days before the reduction or suspension. This notice requirement will be treated as having been met if the notice is provided to employees by August 31, 2020. This relief is not being extended for a reduction or suspension of safe harbor matching contributions.

Clarification on Reduction or Suspension of Contributions for HCEs

Notice 2020-52 also provides further clarity on mid-year amendments to reduce certain contributions to highly compensated employees (HCEs).

In general, a reduction or suspension of safe harbor contributions only for HCEs is not treated as an impermissible reduction, since contributions on behalf of HCEs are not included in the definition of safe harbor contributions. However, Notice 2020-52 clarifies that a notice to HCEs of the reduction or suspension is still required, and a new deferral election opportunity must be given.

Notice 2020-52’s relief provides a degree of assurance that employers will not be violating safe harbor plan rules that pertain to reductions, suspensions, and notices, if they satisfy its conditions. But the guidance does not provide relief from ADP/ACP nondiscrimination testing for the plan year in which such reductions or suspensions have taken place.

The retirement industry eagerly received the IRS guidance on applying provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act with the issuance of Notice 2020-50 on June 19. It has provided important details on compliance with this legislation—which offers financial and tax relief to millions of Americans affected by the coronavirus (COVID-19) pandemic.

The CARES Act was signed into law on March, 27, 2020, as the largest emergency relief package in U.S. history. It offers a variety of potential benefits to those who participate in tax-favored retirement savings arrangements. The legislation not only grants special access to the tax-favored accounts of many who may need it, but also provides a pathway to later repayment. For amounts up to $100,000, there is an exemption from the 10 percent penalty tax for early distributions from a retirement plan, three-year ratable taxation of amounts distributed, and a three-year repayment option for those who qualify.

Although there has been comparable legislation for past disaster events—notably, Hurricane Katrina in 2005—still there has been some uncertainty as to how closely CARES Act procedures might ultimately mirror it. Notice 2020-50 now provides greater clarity and is to be followed in applying CARES Act provisions.

Following are some of the more significant highlights of Notice 2020-50.

CORONAVIRUS-RELATED DISTRIBUTIONS

Qualified Individual Definition Expanded

Notice 2020-50 broadened the definition of who is eligible for a coronavirus-related distribution (CRD)—and therefore eligible for CARES Act tax benefits.

Initial guidance defined a “qualified individual” as

• an individual (or the spouse or dependent of the individual) who is diagnosed with the COVID-19 disease or the SARS-CoV-2 virus in an approved test; or
• an individual who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reduced hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Treasury Secretary.

Notice 2020-50 adds new circumstances to the definition of “qualified individual.”

• An individual who has experienced a reduction in pay (or self-employment income) due to COVID-19, or has had a job offer rescinded or a start date for a job delayed due to COVID-19.
• An individual whose spouse or a member of the person’s household has
  • been quarantined, furloughed or laid off, or had work hours reduced due to COVID-19;
  • been unable to work because of a lack of childcare due to COVID-19,
  • had a reduction in pay (or self-employment income) due to COVID-19; or
  • had a job offer rescinded or a start date for a job delayed due to COVID-19.
• An individual whose spouse or a member of the person’s household has experienced the closing or a reduction of hours of their business due to COVID-19.

For purposes of applying these additional factors, a member of the individual’s household is someone who shares the individual’s principal residence.

Timing

A CRD was defined in the statute as an amount distributed from a retirement account on or after January 1, 2020, and before December 31, 2020. Notice 2020-50 affirmed that a distribution taken on December 31, 2020, would not be a CRD. 

Who Can and Cannot Recontribute CRDs

A CRD can be taxed ratably over three years, and generally can be recontributed to an eligible retirement plan within three years. However, Notice 2020-50 makes clear that while beneficiaries of retirement plans and IRAs may be taxed in this manner, only spouse beneficiaries may make recontributions.

Employer May Choose Whether to Allow CRDs, Other CARES Act Options

Employers can choose to allow participants in their retirement plans (other than pension plans) to take CRDs even without otherwise having a distributable event, if they are qualified individuals, up to $100,000 of their vested balance. 

Notice 2020-50 makes clear that employers are not required to offer CRDs to participants. If they do, they are not required to implement all elements of CARES Act relief, such as enhanced retirement plan loan amount or available loan suspension options. 

Reliance on Employee Certification

Employers that offer retirement plan CRDs are allowed to rely on an employee-participant’s certification that he is a qualified individual, unless the employer has actual knowledge to the contrary. Notice 2020-50 states that an employer is under no obligation to “inquire into whether an individual has satisfied the conditions” of eligibility.

Sample Employee Certification Provided

Notice 2020-50 includes a sample of what the IRS considers “an acceptable certification.”

Reporting/Coding

If an employer has adopted provisions allowing CRDs, they will be reported on IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc. Notice 2020-50 states that for CRDs made to participants (other than beneficiaries) who are otherwise subject to the 10 percent early distribution penalty tax, Code 2, Early distribution, exception applies, may be used. Alternatively, Code 1, Early distribution, no known exception, may be used. (A qualified individual can claim exemption from the 10 percent penalty tax on his individual income tax return if he qualifies for a CRD, regardless of how Form 1099-R is coded.)

Reliance on Employee Certification for Recontributions

Employers that allow recontributions of CRDs are allowed to rely on an employee-participant’s certification that she is a qualified individual, unless the employer has actual knowledge to the contrary. 

Taxpayer Reporting

A qualified individual will report CRDs as distributions and as repayments—if made—on new Form 8915E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments. This is a form in the same series used for certain prior disaster events, such as Hurricane Katrina. A taxpayer can claim CRD status even if distributions were received from a retirement plan whose sponsoring employer did not elect to add CRDs as a distributable event.

Examples of Tax Treatment

Notice 2020-50 provides several examples of tax impacts when both CRDs and repayments occur. These include amending a prior year’s tax return to account for recontributions made later in the three-year ratable taxation period, and choosing to carry forward or carry back—to future or prior years—the tax impact of a repayment that is made during the three-year ratable taxation period.

No Modification of Substantially Equal Periodic Payments

A CRD received by an eligible individual is not to be considered a modification of a series of substantially equal periodic payments as an exemption from the 10 percent early distribution penalty tax.

PLAN LOANS

Deadline to Take Plan Loan Confirmed

Notice 2020-50 confirmed that the final day to take a CARES Act retirement plan loan, including the enhanced loan amount, is September 22, not September 23.

Plan Loan Suspension Safe Harbor

Notice 2020-50 provides a safe harbor for loan repayment when a loan payment suspension is permitted by the employer under CARES Act provisions. Among its conditions: loan payments must resume at the end of the suspension period; the loan’s term may be extended up to one year from the date originally required to be repaid; interest accrued during the suspension period must be added to the remaining loan principal amount; and the loan must be reamortized and repaid in substantially level amounts over the remaining period of the loan.

Notice 2020-50 recognizes that there may be other reasonable interpretations of the CARES Act loan provisions in addition to the Notice’s safe harbor.

Participant Certification as Eligible Individual

Employers that adopt the CARES Act enhanced loan provisions are allowed to rely on an employee-participant’s certification that he is an qualified individual, unless the plan administrator has actual knowledge to the contrary.

The IRS has issued Notice 2020-51, providing additional guidance on the 2020 suspension of RMDs that generally must be taken annually by IRA owners, retirement plan participants, and beneficiaries. 

The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, signed into law by President Trump on March 27, 2020, suspended for the 2020 tax year the general requirement that annual distributions must be taken from tax-favored retirement plans and IRAs when an account owner reaches RMD age, or annually by some account beneficiaries. The timing was problematic for some, who—before the CARES Act enactment—had already in 2020 taken distributions they believed to be required, but under the waiver are not. 

Among the details provided in Notice 2020-51 are the following.

• Extends the normal 60-day rollover period to permit repayments through August 31, 2020, of waived 2020 RMD amounts
• Allows repayments without regard to the one-per-12-month rollover limitation
• Permits repayment by nonspouse beneficiaries of waived 2020 required distributions—these repayments will not violate the statutory prohibition on nonspouse indirect (60-day) rollovers
• Provides a sample plan amendment for defined contribution plans
• Includes a 12-item question-and-answer section related to the 2020 RMD waiver