More Compassion: New CARES Act Guidelines for Pensions and Unqualified Plans | McDermott Will & Emery
In the ongoing effort to help those affected by COVID-19, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) has relaxed distribution and lending rules to provide attendees with a better access to their pension plan funds. The CARES law also suspended the minimum distributions required in 2020 for eligible defined contribution plans. Click here for more details on the pension provisions in the CARES Act.
New Internal Revenue Service (IRS) guidelines expand the availability of CARES Act distributions and loans under qualifying pension plans, and provide important clarifications on how to administer and report distributions and loans from the CARES Act. The guidelines also provide welcome relief to a participant who receives a distribution from the CARES Act, allowing him or her to revoke an otherwise irrevocable salary deferral election under a non-qualifying deferred compensation plan. Finally, consistent with previous guidelines, the new IRS guidelines confirm that the provisions of the CARES Act are optional, meaning that plan sponsors can choose whether or not to implement the changes to the CARES Act.
Expanded availability for distributions and loans under the CARES Act
The new directive expands the definition of a “qualified person”, who is eligible to receive a coronavirus distribution (covered distribution) or a loan under the CARES Act. In addition to the legal definition in the CARES Act, a Qualified Person now also includes a person who suffers negative financial consequences from COVID-19 as a result of any of the below:
- The person’s pay cut, or a delayed or canceled job offer or start date.
- The individual’s spouse, or a person who shares the individual’s primary residence, experiences: (i) quarantine, leave, layoff or reduced working hours; (ii) a reduction in work due to lack of childcare, or (iii) a reduction in pay, or a delayed or canceled job offer or start date.
- The individual’s spouse, or a person who shares the individual’s primary residence, operates or owns a business that closes or reduces hours of operation.
- In determining who is a Qualified Person under the CARES Act, the plan administrator can rely on an individual’s self-certification, unless they have real knowledge to the contrary. In addition, the IRS guidelines provide an example of self-certification for a qualified person.
- The new guidelines also clarified that a person qualified under the CARES Act can include a beneficiary. However, a beneficiary cannot reimburse a covered distribution.
Greater clarity for distributions covered under the CARES Act
The new IRS guidelines clarify the administration of covered distributions for qualifying pension plans made through December 30, 2020 (covered distributions cannot be made on or after December 31, 2020). As a reminder, the CARES law allows a covered distribution of up to $ 100,000 for “qualified persons” affected by COVID-19, without application of the advance distribution penalty of 10%. In addition, a participant who receives a covered distribution may include the distribution in pro-rated taxable income over three years.
In the administration of covered distributions, the new directive indicates that plan administrators are not required to: (i) provide a 402 (f) distribution notice with a covered distribution; (ii) ensure that the amount of the covered distribution corresponds to the fund requirement of the Qualified Person; and (iii) accept reimbursement of covered distributions, unless the plan generally accepts rollover contributions. However, in order to assess whether the maximum limit of $ 100,000 for covered distributions is reached, a plan administrator is required to consolidate all pension plans managed by affiliates into its controlled group of employers. For tax reporting purposes, the new guidelines also clarify the following for plan administrators.
- The plan only applies voluntary withholding tax, rather than the mandatory 20% withholding.
- The plan must report a covered distribution on Form 1099-R even if the qualified person reimburses the covered distribution in the same year.
- Although the 10% early withdrawal penalty does not apply to a covered distribution, the plan is allowed to use code 2 (early distribution, one exception applies) or code 1 (early distribution, no known exceptions. ) for the declaration of Form 1099-R.
- The plan does not treat a covered distribution as a modification of other substantially equal periodic payments, for the purposes of applying the 10% advance distribution tax exception on such periodic payments.
More advice for loan suspensions under the CARES Act
For defined contribution plans, the CARES law has enacted special lending rules that may apply to new loans issued from March 27, 2020 to September 22, 2020 (CARES law loans cannot be granted as of March 23, 2020). September 2020). A new CARES loan can be up to $ 100,000 and 100% of the Qualified Person’s account balance. Additionally, for new and existing loans, the CARES Act allows a plan to suspend any loan repayments due between March 27, 2020 and December 31, 2020. The new directive creates a safe-haven method for such loan suspension. According to the safe harbor method, repayments on loans in the plan are due to resume in January 2021. The plan can also extend the term of the loan up to one year, even if this extension means that the maximum loan term exceeds five years. . The loan balance and future payments must be amortized and adjusted for interest during the period of loan suspension. While the IRS has indicated that other loan suspension methods may be reasonable and permitted, the safe harbor is likely the CARES loan methodology that most plans will implement to facilitate administration and secure amounts. uniform loan repayment terms for qualified persons in 2021.
More clarity on the minimum distributions required in 2020 under the CARES law
The CARES Act waived the minimum required distribution payments (RMD) of 2020 at age 70 and a half from defined contribution plans and IRAs. This optional relief allows participants to delay RMD payments and avoid receiving a distribution when the value of their investments in the pension plan is significantly reduced. Recent IRS guidelines provide that participants, who receive RMD 2020 payments, can integrate them into a qualifying retirement plan, including the original distribution plan. Specifically, the following types of two types of distributions can be incorporated into a qualifying pension plan.
- RMD payments paid in 2020 that are equal to the pre-CARES 2020 RMD payment amounts, whether or not the payments are part of substantially equal periodic distributions.
- RMD payments paid in 2021 for participants whose required start date is April 1, 2021, but only if that participant first receives amounts equal to the 2021 RMD payments.
For plan participants who have already received RMD payments in 2020, the IRS has extended the rollover and repayment periods by 60 days until August 31, 2020, for defined contribution plans and IRAs, including a Legacy IRA.
Participant relief for the unqualified deferred compensation plan
The tax code generally requires a participant to make an irrevocable election to defer salary to an unqualified deferred compensation plan for the coming year. Despite all the reliefs included in the CARES Act, the CARES Act did not include any specific provision allowing a participant to revoke a salary deferral election under an unqualified deferred compensation plan due to COVID-19 . Even if a participant was a Qualified Person with a covered distribution, the CARES Act did not appear to allow a participant to override a wage deferral election under an unqualified deferred compensation plan, unless the participant does not comply with the stricter rules for an unforeseeable emergency under an unqualified deferred compensation plan or for a hardship distribution under a defined contribution plan.
Recent IRS guidelines provide further relief for qualified individuals in unqualified deferred compensation plans. If a member receives a covered distribution from a qualifying pension plan, the non-qualifying plan may accordingly allow that person to cancel an otherwise irrevocable salary deferral election to a non-qualifying deferred compensation plan.
Plan changes for the CARES law
The new guidelines state that all defined contribution plans will be treated as operating under the CARES Act, provided the plan sponsor changes the plan before the CARES Act deadline. For any defined contribution plan that implements CARES Act loans, covered distributions, or changes to the RMD, the plan must be amended by the end of the 2022 plan year. However, if a deferred compensation plan non-qualifying does not currently allow the cancellation of a salary deferral election for a hardship distribution under a defined contribution plan, the non-qualifying plan will require modification. before the cancellation of such an election for a covered distribution.