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Retirement Plans Technical Memorandum

Notice 2020-50 Expands Rights Under the CARES Act

On June 19, 2020, the IRS issued Notice 2020-50, expanding the relief for Coronavirus-Related Distributions (CRDs) from qualified retirement plans provided by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

What are Coronavirus-Related Distributions?

Section 2202(a) of the CARES Act provides special tax treatment for certain distributions from qualified retirement plans.  Generally, distributions from a qualified retirement plan are taxable in the year in which they are made and are also subject to an additional tax of ten percent (10%), if the participant is younger than 59½ years old.  The CARES Act provides that a CRD may be included in the recipient’s taxable income ratably over a three-year period, rather than entirely in the year of distribution.  In addition, the CARES Act exempts CRDs from the 10% tax on early distribution.  So, what is a CRD?

A Coronavirus-Related Distribution is essentially any distribution from a qualified retirement plan made to a “Qualified Individual” on or before December 31, 2020.

Who is a Qualified Individual?  

Section 2202(a)(4) of the CARES Act defines a “Qualified Individual” as any individual:

  • who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 19 (referred to collectively as COVID-19) by a test approved by the CDC;
  • whose spouse or dependent is diagnosed with COVID-19; or
  • who experiences adverse financial consequences as a result of:
  • being quarantined, furloughed or laid off, or having work hours reduced due to COVID-19;
  • being unable to work to lack of childcare; or
  • the closing or reduction of hours of a business owned or operated by the individual due to COVID-19.

At the time that the CARES Act was passed, some observers noted that the definition of Qualified Individual was incomplete.  Certain persons who could be adversely affected by the COVID-19 pandemic were left out of the definition.  For example, what about a person whose spouse was unable to work due to lack of childcare?

Notice 2020-50 to the Rescue!

In Notice 2020-50, the IRS expands the group of persons who are Qualified Individuals and can take advantage of the provisions of the CARES Act.  Notice 2020-50 provides that a Qualified Individual includes 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 of a member of the individual’s household being quarantined, 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 of a member of the individual’s household due to COVID-19.

Rarely does the IRS expand on a taxpayer’s rights.  However, in Notice 2020-50, the IRS corrected what many observers saw as shortcomings of the CARES Act.

Other Important Provisions of Notice 2020-50

  1. The CARES Act requires an employee to certify to her employer that she is in fact a Qualified Individual. The employer can rely on the certification by the employee, unless the employer has “actual knowledge to the contrary”.  There was some confusion whether this imposed a duty on the employer to investigate the truth of the employee’s certification.  Notice 2020-50 says that this requirement “does not mean that the administrator has an obligation to inquire into whether an individual has satisfied the conditions . . .”  Rather, an employer may not rely solely upon the certification of the employee only if the employer “already possesses sufficiently accurate information to determine the veracity of a certification”.   In addition, Notice 2020-50 provides sample language for an acceptable certification.
  2. As stated above, the CARES Act provides somewhat of a tax holiday to a Qualified Individual. While a distribution from a qualified retirement plan is generally includable in taxable income in the year of distribution, the CARES Act permits a Qualified Individual to include a CRD in taxable income ratably over a three-year period.  Notice 2020-50 clarifies that this is an election on the part of the Qualified Individual.  The Qualified Individual may choose instead to include the entire CRD in taxable income in the year of receipt.  However, this election may not be changed.  All CRDs must be treated in the same manner as reflected on the Qualified Individual’s 2020 tax return.
  3. The CARES Act also permits a Qualified Individual to recontribute a CRD to a qualified retirement plan. Unlike the tax treatment of a CRD, whether a CRD will be recontributed to a qualified retirement plan, or the manner in which it will be recontributed, does not have to be determined before the filing of the Qualified Individual’s 2020 tax return.  Notice 2020-50 says that the decision can be made at any time during the three-year period and provides for the filing of amended returns to reflect the recontribution of all or a portion of the CRD,

In Notice 2020-50, the IRS expanded many of the rights created by the CARES Act.  This does not often happen.

To learn how your qualified retirement plan is impacted by the CARES Act or Notice 2020-50, call your RMC representative.

Categories
Retirement Plans Technical Memorandum

What Impact Does the CARES Act Have on Retirement Plans?

The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law by President Trump on March 27, 2020.  It is 880 pages.  This article provides a summary of the some of the key provisions relating to retirement plans.

1. Covid-19 Related Distributions

The CARES Act provides that section 72(t) of the Internal Revenue Code shall not apply to coronavirus-related distributions from certain qualified retirement plans.  This means that a plan participant will not be subject to the 10% penalty for early withdrawal, as long as the aggregate amount of the withdrawal does not exceed $100,000.  The term “aggregate” refers to all plans maintained by the participant’s employer and any member of a controlled group.

Eligible retirement plans include:

  • IRAs
  • Tax-qualified retirement plans
  • Tax-deferred section 403(b) plans
  • Section 457(b) governmental sponsored deferred compensation plans

The exemption from section 72(t) is effective for distributions made during 2020 – calendar year 2020, not plan year 2020.  In addition, the exemption is available only to a plan participant:

  • Who is diagnosed with Covid-19
  • Whose spouse or dependent is diagnosed with Covid-19
  • Who is furloughed or laid off, has work hours reduced or is unable to work due to lack of childcare or is otherwise unable to work due to Covid-19

An employer is required to confirm that the participant meets one of these conditions but can rely on the participant’s certification.

The participant can elect whether to repay the distribution or to have the distribution included in income.  If the participant elects to repay the distribution, it must be repaid in full within three years after the date the distribution is received.  A participant who elects to not repay the distribution is taxed on the distribution ratably over three taxable years beginning with the year of the distribution.

2. Plan Loans

The CARES Act increases the amount of loans that a “qualified individual” can take from a retirement plan.  Beginning on March 27, 2020, for a 180-day period, the loan amount is increased to the lesser of $100,000 or 100% of the participant’s nonforfeitable accrued benefit under the plan.  Prior to this change, the amounts were $50,000 and 50%, respectively.

The CARES Act also changes the terms of loan repayments.  If the due date of any loan repayment occurs between March 27, 2020, and December 31, 2020, the due date is extended for one year.  Subsequent due dates are extended for one year as well.

An employer may need to amend its plan document in order to provide these enhanced rights to its employees.

3. Required Minimum Distributions

The CARES Act provides a temporary waiver of required minimum distributions for participants who turn age 72 in calendar year 2020.

4. Minimum Required Contributions

The CARES Act delays the due date of any employer-contribution to a defined benefit plan required to be made during calendar year 2020 to January 1, 2021.  However, any delayed payment accrues interest from the original due date to the date of payment.  In addition, an employer may elect to treat the plan’s adjusted funding target attainment percentage (“AFTAP”) for the last plan year ending before January 1, 2020, as the AFTAP for the plan year, which includes calendar year 2020.

5. Filing Deadlines

The CARES Act gives the Department of Labor the right to extend any filing deadline under ERISA for a period of one year as a result of the Covid-19 pandemic.

6. Education Assistance

The CARES Act amends section 127(c) of the Internal Revenue Code to include repayment of an employee’s qualified education loan in the definition of non-taxable “educational assistance”.  The payments must be made before January 1, 2021, and are limited to $5,250.

7. Plan Amendments

Some of the provisions of the CARES Act are voluntary, not mandatory.  For example, the provisions regarding coronavirus-related distributions and increased loan amounts apply only if the plan document permits such distributions and loans in the first place.  As a result, a Plan Sponsor may need to amend its plan document in order to afford its plan participants the ability to access such distributions and loans.

A Plan Sponsor can administer the plan in accordance with the necessary amendments, even before the amendments are actually adopted.  However, the amendments must be adopted by the last day of the first plan year beginning on or after January 1, 2022.

8. PBGC

The PBGC has announced the extension of filing deadlines, including premium payments.  Any filing due after April 1, 2020, can be delayed until July 15, 2020.  While this is not part of the CARES Act, it is something that affects defined benefit pension plans.

Some of these provisions will require further guidance, and we will update you as that guidance is issued.  If you have any questions how the CARES Act affects your qualified retirement plan, contact RMC Group.

*Revised April 21, 2020

Categories
Health and Benefits Technical Memorandum

Coronavirus Aid, Relief and Economic Security Act [Technical Memorandum]

On Friday, March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) into law.  The CARES Act is a wide-ranging piece of legislation that impacts almost every aspect of American life.  This article will discuss some of its effects on healthcare.

1. Covid-19 Testing

The Families First Coronavirus Response Act (“FFCRA”) requires group and individual health plans, whether fully-insured or self-insured, to cover the full cost of testing for the Coronavirus.  The FFRCA eliminated deductibles, co-pays and coinsurance in connection with Coronavirus testing.  The problem with the FFRCA was that it was limited to FDA-approved tests.  The CARES Act expands the type of tests, which a health plan is required to cover to include tests that:

  • have been submitted to the FDA for approval;
  • have been developed or authorized by a state; or
  • have been determined by the Department of Health and Human Services to be appropriate for the purpose.
2. Coverage of Covid-19 Vaccines

While the FFCRA requires that health plans cover the cost of testing for the Coronavirus, it does not require that health plans cover the cost of any item or service designed to prevent Covid-19, such as a vaccine.  The CARES Act requires health plans to cover the full cost of any item or service that is intended to prevent or mitigate Covid-19 and that is:

  • an evidence-based item or service that has a rating of A or B in the current recommendations of the U.S. Preventive Services Task Force; or
  • an immunization that has a recommendation from the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention with respect to the individual involved.

A health plan is required to cover the cost of such item or service 15 days after one of the foregoing conditions has been met.

3. Cost of Testing

The CARES Act sets the price that a health plan is required to pay for Covid-19 testing as:

  • the price negotiated between the plan and provider; or
  • if the plan and provider have not negotiated a price, then the price listed by the provider on its public website.

A provider can be charged a fine of $300 per day for failure to list the price on its public website.

4. High-Deductible Health Plans

The CARES Act provides that a high-deductible health plan can pay the full cost of telehealth services without cost-sharing, even if the participant has not met the plan’s deductible for the year.  In addition, the participant can continue to fund an HSA.  This provision is effective for plan years beginning before December 31, 2021.

The CARES Act is not likely to be the final piece of legislation enacted by Congress to fight the Coronavirus pandemic.  We will keep you posted about future developments.  If you have any questions about the CARES Act or how it impacts your health plan, please contact RMC Group.