Regulatory Update: IRS guidance on the effect of CARES Act relief on distributions, loans, RMDs, and 409A deferral elections
In June IRS published two Notices providing guidance on the treatment of distributions and loans, on required minimum distributions (RMDs), and on the cancellation of deferral options under Tax Code section 409A as a result of CARES Act legislation. In this update we briefly review those Notices.
IRS Notice 2020-50
On June 19, 2020, IRS issued Notice 2020-50, providing guidance on COVID-related distributions and loans under the CARES Act. The Notice:
Extends (marginally) the definition of “qualified individual” (eligible to take advantage of the CARES Act tax benefits for COVID-related distributions) to include (among others) (1) an individual affected by a COVID-related reduction in pay/self-employment income or the rescission of a job offer or delay in a job start date and (2) an individual whose spouse or household member is affected by COVID-related events (e.g., furlough or reduced hours).
Provides that an individual may designate a distribution as COVID-related without regard to the plan’s treatment of it. Thus, a plan RMD may be re-designated by the individual as COVID-related. The reverse is also true: a plan may treat a distribution as COVID-related, and the participant may re-designate it as not COVID-related (e.g., where the participant is receiving distributions from different plans in excess of $100,000).
Clarifies that, with respect to a COVID-related distribution, plans are not required to (1) offer a direct rollover, (2) provide a § 402(f) notice, or (2) withhold 20% (however, the distribution is subject to voluntary withholding rules). (These rules would normally apply to rollover distributions.)
Clarifies that the sponsor/administrator may develop any reasonable procedures for identifying COVID-related distributions.
Clarifies that the plan administrator may rely on employee certification that a distribution is COVID-related and has no duty to inquire about the truthfulness of that certification. In this regard, the Notice provides a “model” certification. This rule/certification also applies for re-contributions of COVID-related distributions.
Includes detailed rules on the application of the CARES rule that a COVID-related distribution may be included in income over three years and may be re-contributed to a plan.
Includes guidance and a safe harbor for the application of the CARES Act loan suspension/re-amortization rules.
Includes guidance that a nonqualified deferred compensation plan (subject to Tax Code section 409A) may provide for cancellation of a deferral election or such a cancellation may be made due to a COVID-related distribution as updated by this Notice. This makes clear that such action must be a cancellation and not a delay or postponement and therefore the five-year pushback rule does not apply.
On June 23, 2020, IRS issued Notice 2020-51, providing guidance on the application CARES Act RMD relief. The Notice:
Clarifies the rollover rules for RMDs “waived” under the CARES Act and provides an extension of the 60-day rollover period for certain distributions to August 31, 2020.
Provides transition relief for RMDs with respect to individuals with required beginning dates affected by the SECURE Act (which generally increased the RBD from 70 1/2 to 72).
Provides relief from certain rollover rules (e.g., the 402(f) notice requirement) for “non-RMDs” affected by these rules.
Clarifies that, generally, that the following distributions may be rolled over:
2020 distributions paid in 2020 (or paid in 2021 for 2020 for participants with an April 1, 2021 RBD) that either (1) but for the CARES Act rule would be RMDs or (2) are part of a (RMD compliant) series of periodic payments.
2021 distributions for participants with a RBD of April 1, 2021, that would have been an RMDs but for the CARES Act. (This rule may apply where a 2020 retiree receives payments as part of a series of substantially equal periodic payments.)
Clarifies that where a plan permits participants/beneficiaries to elect between the 5-year rule and the life expectancy rule for determining RMDs, the deadline for 2020 elections may in appropriate circumstances be extended to the end of 2021.
Clarifies that the CARES Act does not change an individual’s RDB. Thus, e.g., an individual with an April 1, 2020, RBD who dies after April 1, 2020, would be treated as dying after her RBD.
The Notice provides a sample plan amendment to implement these rules.
There were two other major regulatory developments out of DOL in June 2020, for which we have provided stand-alone articles:
DOL releases proposed regulation on ESG investments: On June 24, 2020, the Department of Labor released a proposed amendment to regulations under ERISA section 404(a) (which describes general fiduciary standards), providing regulatory guidance with respect to fiduciary decisions to invest plan assets based on environmental, social, and corporate governance (ESG) factors or in ESG-themed funds. Our article reviews the proposal, beginning with a brief set of sponsor takeaways.
DOL releases proposed fiduciary advice Prohibited Transaction Exemption: On June 29, 2020, DOL released a proposed class Prohibited Transaction Exemption that would allow “investment advice fiduciaries … to receive compensation, including as a result of advice to roll over assets from a Plan to an IRA … that would otherwise violate the prohibited transaction provisions of ERISA and the Code.” The proposed PTE would retain the 1975 “five-part test” for who is an “investment advice fiduciary,” but the PTE includes an extensive “interpretation” (or re-interpretation) of that test that in many ways broadens it beyond prior law and practice and articulates principles for its application to plan-to-IRA rollovers. In our article, we begin with a discussion of why this proposal may be relevant to plan sponsors, and then provide a brief summary of it.
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We will continue to follow these issues.