Archived Insight | July 10, 2020

More Retirement Plan Guidance on Distributions and Loans

In response to requests for guidance on retirement plan loans and distributions for individuals affected by COVID-19, the IRS issued three new Notices and also new guidance for safe-harbor 401(k) plans that wish to reduce contributions:

  • Notice 2020-50 supplements earlier guidance that the IRS issued on distributions and loans and includes a model certification form.
  • Notice 2020-51 provides guidance on the waiver of 2020 DC plan required minimum distributions (RMDs) and provides a sample amendment.
  • Notice 2020-52 eases the rules for mid-year changes to safe-harbor 401(k) contributions.

Plan sponsors that have already adopted CARES Act amendments or implemented administrative procedures may wish to revisit them in light of this latest IRS guidance.

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Notice 2020-50 expands access to distributions and loans

Notice 2020-50 broadens the definition of who is a “qualified individual” for coronavirus-related distributions and loans by:

  • Adding those who have experienced adverse financial consequences as a result of COVID-19, such as reductions in pay, rescissions of job offers and delayed job starting dates
  • Including the impact of any of the (old or new) factors on the participant’s spouse or on any other member of the participant’s household

Additionally, Notice 2020-50 clarifies that:

  • Plan sponsors can choose whether to implement the CARES Act’s distribution and loan rules.
  • Participants can claim the tax benefits of the CARES Act distribution rules even if their plan has not been amended to incorporate distribution language provided they are qualified individuals.
  • A plan administrator can rely on a participant’s certification that they are a qualified individual for both distributions and loans unless the administrator knows that is not the case. A sample certification is included in the Notice.
  • Plans have flexibility as to how they address amortization of suspended loan payments. The Notice includes a safe-harbor method.

Notice 2020-50 also provides CARES Act distribution tax-reporting information for both plans and participants.

Notice 2020-51 clarifies rules for 2020 DC Plan RMDs

Notice 2020-51 addresses most of the questions that have arisen with respect to 2020 RMDs and provides additional relief related to DC plan distributions. The highlights include:

  • Relief for mistaken employer reporting of distributions made earlier in 2020 that would have been RMDs absent the CARES Act
  • The ability to rollover DC distributions that would have been RMDs in 2020 absent the CARES Act that are in the form of substantially equal payments over life, life expectancy or a period of at least 10 years
  • An extension of the 60-day rollover limit so that participants have until at least August 31, 2020 to roll over any DC plan distribution in 2020 that would have been an RMD absent the CARES Act
  • Clarification that no distribution for 2020 is required for a participant whose required beginning date (RBD) will be April 1, 2021 in a plan that delays the RBD until retirement
  • Clarification that certain beneficiary elections that would have had to be made in 2020 do not have to be made until the end of 2021
  • For DC plans that wish to give participants a choice between taking or not taking 2020 required distributions, sample amendments to address whether the plan default will be “no distribution unless the participant elects the distribution” or “normal distribution unless the participant elects no distribution”

Notice 2020-51 also includes a question and answer section that answers 12 specific questions how the 2020 RMD waiver affects related rules such as those dealing with election timing and spousal consents.

Notice 2020-52 temporarily allows mid-year safe-harbor contribution changes

Notice 2020-52 eases the rules that sponsors must follow to make mid-year changes that reduce or suspend employer contributions to safe-harbor 401(k) plans. Safe-harbor plans satisfy the 401(k) nondiscrimination test and 401(m) matching contribution nondiscrimination test by making specified minimum nonelective or matching contributions.

Under this guidance, between March 13, 2020 and August 31, 2020, sponsors of safe-harbor 401(k) plans may adopt an amendment:

  • Suspending or reducing safe-harbor nonelective or matching contributions without having to show economic loss or satisfying certain prior notice requirements
  • Suspending or reducing safe-harbor nonelective contributions (but not matching contributions) mid-year without providing a 30-day advance notice provided the amendment is adopted no later than the effective date of the suspension or reduction and a supplemental notice is provided by August 31, 2020

The Notice also clarifies that a plan may adopt a mid-year amendment that suspends or reduces contributions for only highly compensated employees. However, the plan must still provide those employees with an updated safe harbor notice and an election opportunity.

The relief in Notice 2020-52 also applies to 403(b) plans that use the matching-contribution safe harbor.

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This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.