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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 

Companion bills have been introduced in the U.S. House of Representatives and Senate to provide additional capital to small businesses hardest hit by the coronavirus (COVID-19) pandemic. The Prioritized Paycheck Protection Program (P4) Act is sponsored in the Senate by Democrats Chris Coons (DE), Ben Cardin (MD), and Jean Shaheen (NH), and in the House by Democrats Angie Craig (MN), and Antonio Delgado (NY).

The P4 Act would authorize additional Paycheck Protection Program (PPP) loans to businesses with 100 or fewer employees—including sole proprietorships and other self-employed—that have already expended the proceeds of a prior PPP loan or are on-pace to do so, and that can demonstrate a loss of business revenue of 50 percent or more due to the COVID-19 pandemic.

PPP is a Small Business Administration lending program created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help small employers meet payroll and other expenses as businesses and the nation deal with the economic effects of the novel coronavirus pandemic.

Importantly, if certain conditions are met, PPP loans can be forgiven and treated as a grant. Payroll expenses can include employer contributions to defined contribution and defined benefit retirement plans, as well as providing group health care coverage, including payment of insurance premiums.

The IRS has issued Notice 2020-50, providing additional guidance on several aspects of the Coronavirus Aid, Recovery, and Economic Security (CARES) Act, legislation enacted in March of this year in response to the coronavirus (COVID-19) pandemic.

A “qualified individual” who has experienced health or financial effects from the COVID-19 pandemic is eligible for certain retirement plan distribution, penalty exemption, plan loan and loan repayment, taxation, and repayment benefits.

Qualified Individual Further Defined

Initial guidance defines 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.
• A person whose spouse or a member of her 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.
• A person whose spouse or a member of her 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.

CARES Act Loans

Notice 2020-50 provides examples of how to apply the special plan loan provisions of the CARES Act, and includes a safe harbor method. In addition, the Treasury Department and IRS recognize that there may be additional reasonable ways to administer loan repayments under the CARES Act.

This guidance is being further analyzed, and additional details will be shared.

The Department of Labor’s Employee Benefits Security Administration (EBSA) has released a pre-publication version of a request-for-information (RFI) seeking public comments on issues pertinent to pooled employer plans (PEPs) and multiple employer plan (MEPs).

This initiative follows enactment in December 2019 of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, some provisions of which were intended to enhance the ability of multiple entities to join together in a single retirement plan, and—if certain conditions were met—be treated as a single employer, allowing potential administrative efficiencies and cost savings. The SECURE Act established statutory conditions for the establishment of new affiliations to be known as PEPs, which would require the designation of a “pooled plan provider” that would be a fiduciary of the PEP. 

Issues that EBSA anticipates could include the “possible parties, business models, and conflicts of interest that … will be involved in the formation and ongoing operation of PEPs,” according to an EBSA news release. EBSA is also seeking “information on similar issues involving multiple employer plans sponsored by employer groups or associations or professional employer organizations.” 

The comments received could shape potential future EBSA guidance on the operation of these arrangements, including whether EBSA should propose a new prohibited transaction class exemption.

The RFI contains instructions for submitting comments and is scheduled to be published in tomorrow’s Federal Register.

Scheduled for publication in next Tuesday’s Federal Register is a Small Business Administration (SBA) interim final rule on the agency’s Paycheck Protection Program (PPP). This guidance is being issued in response to enactment on June 5 of the Paycheck Protection Program Flexibility Act of 2020, legislation that made enhancements to this SBA loan program intended to help small employers meet payroll and other expenses as they deal with the economic effects of the novel coronavirus (COVID-19) pandemic.

If certain conditions are met, PPP loans can be forgiven and treated as a grant. Payroll expenses can include not only wages and salary, but also employer contributions to defined contribution and defined benefit retirement plans, as well as providing group health care coverage, including payment of insurance premiums.

The SBA issued a previous interim final rule in April 2020 to provide guidance in implementing PPP. But with the program changes made by the June 5 legislation, that April rule no longer reflects certain important features of PPP as it now exists, requiring the issuance of a new interim final rule. These important PPP changes include the following.

• Extends from 8 to 24 weeks from a loan’s origination the period in which expenses paid with a PPP loan could be eligible for loan forgiveness (not to extend beyond December 31, 2020)
• Reduces from 75 percent to 60 percent the portion of a loan that must be used for payroll expenses (vs. overhead, etc.) and remain fully eligible for loan forgiveness
• Extends from 2 to 5 years the period for loan repayment for borrowed amounts that are not forgiven (applies to loans made on or after June 5, 2020)
• Allows a borrower who received a PPP loan before enactment of the June 5 legislation to elect that the covered period run for 8 (vs. 24) weeks

The SBA notes that this interim final rule is effective without advance notice and public comment because of its time sensitivity and specific authorization by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the legislation that created the PPP lending program. Nonetheless, comments are invited and must be submitted within 30 days of the guidance’s publication in the Federal Register.

Contribution Deadline and Defined Benefit Funding Relief. Some contribution deadlines have been extended and certain defined benefit (DB) plans are eligible for funding relief.

President Trump signed into law Friday, June 5, the Paycheck Protection Program Flexibility Act of 2020, legislation that the Senate approved Wednesday night. The legislation extends elements of and makes certain other adjustments to the Paycheck Protection Program (PPP). This Small Business Administration lending program was created by the Coronavirus Aid, Relief, and Economic Security Act to help small employers meet payroll and other expenses as businesses and the nation deal with the economic effects of the novel coronavirus pandemic.

Importantly, if certain conditions are met, PPP loans can be forgiven and treated as a grant. Payroll expenses can include employer contributions to defined contribution and defined benefit retirement plans, as well as providing group health care coverage, including payment of insurance premiums.

Among its provisions, this legislation will have the following effects.

• Extends from 8 to 24 weeks from the time of loan origination the period in which expenses paid with a PPP loan could be eligible for loan forgiveness (not to extend beyond December 31, 2020)
• Reduces from 75 percent to 60 percent the portion of a loan that must be used for payroll expenses (vs. overhead, etc.) and remain eligible for loan forgiveness
• Extends from 2 to 5 years the period for loan repayment for borrowed amounts not forgiven
• Provides no impediment to loan forgiveness for the documented inability to hire similarly qualified placement employees or to rehire former employees
• Allows a borrower who received a PPP loan before enactment of this legislation to elect that the covered period run for 8 (vs. 24) weeks

On Wednesday night, the U.S. Senate approved by voice vote H.R. 7010, the House-passed Paycheck Protection Program Flexibility Act of 2020. The legislation extends elements of and makes certain other adjustments to the Paycheck Protection Program (PPP). This Small Business Administration lending program was created by the Coronavirus Aid, Relief, and Economic Security Act, to help small employers meet payroll and other expenses as businesses and the nation deal with the economic effects of the novel coronavirus pandemic.

Importantly, if certain conditions are met, PPP loans can be forgiven and treated as a grant. Payroll expenses can include employer contributions to defined contribution and defined benefit retirement plans, as well as providing group health care coverage, including payment of insurance premiums.

Among its provisions, the legislation now presented to President Trump—who is expected to sign it into law—would have the following effects.

• Extend from 8 to 24 weeks from the time of loan origination the period in which expenses paid with a PPP loan could be eligible for loan forgiveness (not to extend beyond December 31, 2020) 
• Reduce from 75% to 60% the portion of a loan that must be used for payroll expenses (vs overhead, etc.) and remain eligible for loan forgiveness
• Extend from 2 to 5 years the period for loan repayment for borrowed amounts not forgive
• The documented inability to hire similarly qualified placement employees or to rehire former employees will not be an impediment to loan forgiveness
• A borrower who received a PPP loan before enactment of this legislation may elect that the covered period run for 8 (vs 24) weeks

The Department of Labor’s Employee Benefits Security Administration (EBSA) today released an Information Letter addressing the issue of including private equity investments—which are not publicly traded securities—among investment options available in certain individual account (401(k)-type) defined contribution (DC) plans.

EBSA’s letter indicates that such plans could potentially include funds with a private equity component. But the EBSA pointed out that there are significant differences between such DC plans and professionally managed defined benefit (DB) plans, wherein retirement benefits are based on known formulas. EBSA’s letter describes in detail considerations that a plan fiduciary should take into account when determining whether it is prudent to include such an investment component in an individual account DC plan, especially if a private equity investment will be a component of a plan’s qualified default investment alternative (QDIA).