We understand that the uncertainty and disruption caused by COVID-19 have led to a lot of questions including many related to retirement plan administration. While the situation has been changing on an almost hourly basis, we wanted to distribute answers to the questions we are seeing often based on the information we have at this time.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the CARES Act) was signed into law. This expansive law included a number of provisions that affect retirement plans that are intended to give participants affected by the current pandemic access to their assets in retirement plans while minimizing the tax consequences and maximizing the ability to return the assets to the plan, if it is possible.
While much of the language regarding retirement plan provisions is similar to provisions used in the past for disaster relief and RMD waiver, it is unclear at this time how much we can rely on guidance issued related to those changes. This FAQ is intended to be a general overview of the provisions and it is expected that the IRS and/or DOL will issue guidance related to these provisions in the future.
For issues not addressed by the CARES Act, the current rules continue to apply unless there is further legislation or guidance.
Many of the topics discussed below are complex topics that we only address at a very high level; this FAQ is not intended to be a full discussion of all factors involved in making plan administration determinations.
Q1. What is a Coronavirus-Related Distribution (CVRD)?
A1. A CVRD is a distribution to a “CVRD Qualified Participant” that is taken on or after January 1, 2020 and before December 31, 2020.
Q2. Do plans have to allow for Coronavirus-Related Distribution (CVRD)?
A2. No, CVRDs are optional distribution triggers.
Q3. Who is a CVRD Qualified Participant?
A3. A CVRD Qualified Participant is a participant who meets at least one of the following requirements.
- who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (referred to collectively in this notice as COVID-19) by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act);
- whose spouse or dependent (as defined in section 152 of the 5 Code) is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act; or
- who experiences adverse financial consequences as a result of:
- the individual being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19;
- the individual being unable to work due to lack of childcare due to COVID-19; or
- closing or reducing hours of a business owned or operated by the individual due to COVID-19.
- In addition, pursuant to the authority of the Secretary to issue guidance to provide for other factors under section 2202(a)(4)(A)(ii)(III) of the CARES Act, a qualified individual for purposes of Notice 2020-50 is an individual who experiences adverse financial consequences as a result of:
- the individual having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19;
- the individual’s spouse or a member of the individual’s household (as defined below) being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; or
- closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household 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.
Q4. Does a participant need to be an active employee to be a CVRD Qualified Participant?
A4. No. There is nothing in the Bill that would require the participant to be a current employee to be a CVRD Qualified Participant.
Q6. What kind of documentation does the plan need to obtain to determine that a participant is a CVRD Qualified Participant?
A6. The plan administrator may allow participants to self-certify that they are a CVRD Qualified Participant.
Q7. Where can CVRDs be taken from?
A7. Any “Eligible Retirement Plan” as defined in IRC Sec. 402(c)(8)(b) which includes:
- IRA and IRA annuities under IRC Sec. 408(a) and 408(b)
- Defined Contribution and Defined Benefit plans under IRC Sec. 401(a)
- An annuity plan under IRC Sec. 403(b)
- A plan under IRC Sec. 403(b)
- A Governmental 457(b) plan under IRC Sec. 457(e)(1)(A)
Q8. How much can be taken in a CVRD?
A8. A participant’s CVRD cannot exceed $100,000 (or their vested account balance) from all plan maintained by the employer. If the employer is a member of a controlled group or affiliated service group this limit will be aggregated over all the plans.
Q9. What are the tax implications of taking a CVRD?
A9. The 10% early withdrawal penalty tax has been waived for CVRD. The pre-tax portion of the CVRD is subject to normal taxation. However, the participant may choose to spread the taxable income evenly over 3 taxable years starting with the 2020 tax filing.
While a CVRD will be treated as an eligible rollover distribution for many plan purposes, the 20% mandatory withholding will not apply.
Q10. Can a CVRD be repaid?
A10. Yes. The participant will have three years starting from the day following the day the distribution was received. The amount can be rolled over following the normal rules for an eligible rollover distribution (ERD) and will be treated as an ERD for plan purposes.
Q11. Does the plan have to be amended before CVRDs are allowed?
A11. No, plans may operationally allow for CVRDs before the plan is formally amended. The amendment deadline is the last day of the plan year beginning on or after January 1, 2022 (or a later date if specified by the Secretary of the Treasury) with an additional two years for governmental plans.
Coronavirus-Related Loan Provisions
Q14. Are there special loan provisions for CVRD Qualified Participants?
A14. Yes. The CARES Act has two main loan provisions:
- An increase in the amounts used to determine the maximum loan amount allowed.
- A delay in repayment for new and existing loans.
Q15. What are the changes to the loan maximum calculations?
A15. For loans made during a 180-day time frame starting on March 27, 2020, when calculating the maximum loan amount that a CVRD Qualified Participant may take the $50,000 or 50% of vested account balance portion of the calculation is increased to $100,000 and 100% of the vested account balance.
Q16. What are the loan repayment changes?
A16. For a CVRD Qualified Participant who has a loan payment due on a new or existing loan from March 27, 2020 thru December 31, 2020, those payments will be delayed by a year. Loan payments will restart with any payments due on or after January 1, 2021. The skipped payments (and any interest that accrued on those skipped payments) must be repaid starting on the one-year anniversary of the first skipped payment.
When the repayments start, the amount will be adjusted to account for the missed interest. Additionally, the maximum repayment period (5 years for most loans) will be extended by the time frame in which payments were skipped.
Q17. Does the plan have to be amended before the loan provisions are utilized?
A17. No, plans may operationally use the loan provisions before the plan is formally amended. The amendment deadline is the last day of the plan year beginning on or after January 1, 2022 (or a later date if specified by the Secretary of the Treasury) with an additional two years for governmental plans.
2020 RMD Waiver
Q18. What plans can waive the 2020 RMD requirements?
A18. The plan types that can waive the 2020 RMD requirements are:
- 401(a) defined contribution plans (this includes 401(k) and profit sharing plans).
- 403(a) and 403(b) defined contribution plans.
- Governmental 457(b) plans.
Q19. What RMDs are waived?
A19. RMDs that are required to be distributed to participants or beneficiaries in the 2020 calendar year. This includes first year RMDs that have a required beginning date in 2020.
Q20. What about participants who turn 72 in 2020?
A20. 2020 is disregarded in determining the required beginning date so a participant who turns 72 in 2020 will be treated as if they turned 72 in 2021.
Q21. Do plans have to allow participants to waive their 2020 RMD? Can they force participants to waive their 2020 RMD?
A21. While it is unclear from the CARES Act if this is a mandatory or permissible provision, the language used is mostly identical to the language used in WRERA for the 2009 RMD waiver which the IRS determined was a permissible waiver. If the IRS follows the logic they did in 2008/2009 the plan sponsor would have the options to (1) allow their participants the choice to waive their RMD; (2) waive all RMDs that had not already been distributed; or (3) make no change and force participant to take their RMD as set forth in the plan.
Q22. If the participant has already taken their RMD, can they roll it back into a qualified retirement plan or an IRA?
A22. It is unclear at this time if those amounts could be rolled back into a qualified retirement plan or IRA. The ability to do so for the 2009 RMD waiver came from IRS Notice 2009-82.
Please note the information that we are providing is not intended as legal advice or a "legal opinion". You should consult with your legal counsel for a complete and accurate review of the law as it applies to your specific situation. Any U.S. Federal tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties under the Internal Revenue Code or applicable state or local tax law provisions