Recently, the IRS issued Notice 2020-50 to update and clarify certain provisions of Section 2202 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which deals with the tax treatment of coronavirus-related distributions from eligible retirement plans for qualified individuals.

Under the CARES Act, retirement plan participants may borrow up to $100,000 or 100% of their vested balance, whichever is less. This applies only to loans taken out from March 27, 2020, to September 23, 2020 and comes with the following tax benefits:

  • 10% tax penalty is waived, although withdrawals are still taxed as ordinary income;
  • Withdrawals will not be subject to mandatory 20% withholding from an early distribution;
  • Total withdrawal amount can be spread over three years for tax purposes; and
  • Participants have up to three years to return funds, which can be paid back to any eligible retirement plan with no tax consequence.

Eligibility for CARES Act Retirement Plan Withdrawals

The Notice expands the definition of a “qualified individual” eligible to take coronavirus-related distributions from their retirement plans. Originally, a “qualified individual” under the CARES Act was defined as an individual who:

  • Has been diagnosed, or whose spouse or dependent has been diagnosed, with COVID-19 by a test approved by the CDC; or
  • Has experienced adverse financial consequences due to COVID-19 as a result of being furloughed, laid off, quarantined, had work hours reduced, had a business owned or operated by an individual closed or operating under reduced hours, or is unable to work due to lack of childcare.

As expanded by the Notice, a “qualified individual” under the CARES Act is now defined as an individual who:

  • Has been diagnosed, or whose spouse or dependent has been diagnosed, with COVID-19 by a test approved by the CDC; or
  • Has experienced adverse financial consequences due to COVID-19 as a result of the individual, the individual’s spouse, or a member of the individual’s household:
    • Being quarantined, being furloughed or laid off, or having work hours reduced;
    • Being unable to work due to lack of childcare;
    • Closing or reducing hours of a business that they own or operate;
    • Having pay or self-employment income reduced; or
    • Having a job offer rescinded or start date for a job delayed.

Individuals must self-certify that they are eligible for coronavirus-related distributions, and the Notice includes a sample certification to be provided to a retirement plan administrator.

Employers can choose whether to implement coronavirus-related distribution and loan rules and amend their plans accordingly. Qualified individuals can claim the tax benefits of coronavirus-related distribution rules even if plan provisions aren’t changed.

The IRS guidance also provides employers a safe harbor procedure for implementing the suspension of loan repayments otherwise due through the end of 2020 but notes that there may be other reasonable ways to administer these rules.