IRS Guidance On Coronavirus-Related Retirement Plan Distributions

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.

Pension Plans

The Notice points out that Section 2202 does not change the rules for when plan distributions are permitted to be made from employer retirement plans. Thus, a qualified pension plan is not 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 is not permitted to make a distribution under a distribution form that is not a qualified joint and survivor annuity without spousal consent merely because the distribution, if made, could be treated as coronavirus-related.

Distribution & 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) are not applicable to the distribution. Thus, the plan is not required to offer the qualified individual a direct rollover with respect to the distribution. The plan administrator also is not required to provide a Section 402(f) notice.

In addition, the plan administrator or payor of the coronavirus-related distribution is not required to withhold an amount equal to 20 percent of the distribution, as is usually required. However, a coronavirus-related distribution is subject to voluntary withholding requirements.

Distribution Limits

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 will not fail to satisfy any requirement of the IRC merely because a qualified individual’s total coronavirus-related distributions exceed $100,000, including distributions from individual retirement accounts or other eligible retirement plans maintained by unrelated employers.

Distribution Treatment

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 is not 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.

Key Points

These are just a few of the key points made in Notice 2020-50. Our firm can provide further guidance and clarification – contact us for more information.

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