Legal Alert

IRS Guidance Provides COVID-19 Relief for Participants Taking Retirement Plan Distributions and Loans

by the Employee Benefits and Executive Compensation Group
June 25, 2020

The IRS has released Notice 2020-50, which provides guidance to employers that have amended their retirement plans to take advantage of provisions under the CARES Act that provide access to special plan distributions, known as Coronavirus-Related Distributions (CRDs), and expanded plan loans.

Coronavirus-Related Distributions

The CARES Act permits employers to amend their eligible retirement plans to allow qualified individuals (QIs) to receive CRDs from their accounts between January 1, 2020, and December 30, 2020. CRDs are available in amounts of up to $100,000, and are not subject to the 10 percent early distribution penalty tax that might otherwise apply. Additionally, CRDs will not be treated as eligible rollover distributions, so the mandatory 20 percent withholding also does not apply. CRDs generally are includible in income ratably over a three-year period starting in 2020. Alternatively, a QI could elect to include the entire distribution in income in 2020. QIs also may choose to repay the CRDs to an eligible retirement plan or IRA, however the plans are not required to permit repayment. If a CRD is repaid, or “recontributed,” within three years of receipt, the distributed amount will be treated as though it were paid in a direct rollover, so that the QI will not have to include the CRD amount in income for federal income tax purposes.

Expanded Definition of QIs 

Notice 2020-50 expands the definition of who can qualify as a QI.

A QI is now anyone who:

  1. is diagnosed, or whose spouse or dependent is diagnosed, with the virus SARS-CoV-2 or the coronavirus disease 2019 (collectively, COVID-19) by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or
  2. experiences adverse financial consequences as a result of the individual, the individual’s spouse, or a member of the individual’s household (someone who shares the individual’s principal residence):
    1. being quarantined, furloughed or laid off, or having work hours reduced due to COVID-19;
    2. being unable to work due to lack of childcare due to COVID-19;
    3. closing or reducing hours of a business that they own or operate due to COVID-19;
    4. having pay or self-employment income reduced due to COVID-19; or
    5. having a job offer rescinded or start date for a job delayed due to COVID-19.

Additional Guidance on CRDs

Notice 2020-50 clarifies that a QI is permitted to designate a distribution meeting the CRD requirements as a CRD regardless of whether the plan treated the distribution as such. For example, the CARES Act permits participants in eligible retirement plans and IRAs to waive required minimum distributions (RMDs) in 2020. Notice 2020-50 provides that amounts that would have been RMDs but for the CARES Act, and that are received by a QI during 2020, are permitted to be treated as CRDs if they otherwise qualify. In addition, a reduction or offset of a QI’s plan account in order to repay a plan loan may be treated as a CRD. The IRS acknowledges that a QI’s designation of a CRD may be different from the plan’s treatment of the distribution.

The IRS notice also provides that CRDs need not be withdrawn solely to meet a need arising from the pandemic. Unlike the requirements under the Treasury regulations related to hardship distributions, the amount of the CRD is not required to correspond to the extent of the adverse financial consequences experienced by the QI.

Guidance for Plans Making or Accepting Recontributions of CRDs

Tax Reporting on CRDs and Recontributions of CRDs

Eligible retirement plans (including IRAs) must report the payment of a CRD to a QI on Form 1099-R. This reporting is required even if the QI recontributes the CRDs to the same eligible retirement plan in the same year.

Acceptance of and Treatment of CRD Recontributions as Rollover Contributions

Generally, a QI who receives a CRD that is eligible for tax-free rollover treatment can, at any time during a three-year period beginning on the day after the date the CRD was received, make one or more recontributions in an aggregate amount not to exceed the amount of the distribution to an eligible retirement plan (i.e., a qualified plan, 403(b) plan, governmental 457(b) plan, or IRA). Prior to accepting a CRD recontribution, plan administrators must reasonably conclude that the recontribution is eligible for direct rollover treatment under the CARES Act. In making this determination, the plan administrator may rely on an individual’s certification that he or she satisfies the conditions to be a QI, unless the plan administrator has actual knowledge to the contrary. If a plan does not accept rollover contributions, the plan is not required to change its terms or procedures to accept recontributions of CRDs.

Safe Harbor for Loan Repayment Suspensions

Notice 2020-50 provides a safe harbor for implementing the suspension of loan repayments. Under the safe harbor, a qualified retirement plan will be treated as satisfying CARES Act loan provisions if it suspends for up to one year a QI’s obligation to repay a loan that is due from March 27, 2020, through December 31, 2020 (the “suspension period”). Loan repayments must resume after the end of the suspension period, and the term of the loan may be extended by up to one year from the date the loan was originally due to be repaid. Such a suspension will not cause the loan to be deemed distributed even if, due solely to the suspension, the term of the loan is extended beyond five years. Interest accruing during the suspension period must be added to the remaining principal of the loan. A plan satisfies the safe harbor if the outstanding loan amount is re-amortized and repaid in substantially level installments over the remaining period of the loan (for non-principal residence loans, five years from the date of the loan plus up to one year from the date the loan was originally due to be repaid). If a plan sponsor chooses to permit a suspension period that is less than the maximum suspension period, the plan sponsor is permitted to extend the suspension period subsequently, but not beyond December 31, 2020.

Cancellation of Deferral Election Under Nonqualified Deferred Compensation Plan

A nonqualified deferred compensation (NQDC) plan subject to Code Section 409A may provide for a cancellation of a service provider’s deferral election, or such a cancellation may be made, due to an unforeseeable emergency or a hardship distribution pursuant to 26 C.F.R. § 1.401(k)-1(d)(3). Notice 2020-50 provides that if an individual receives a distribution from an eligible retirement plan that constitutes a CRD, that distribution will be considered a hardship distribution for purposes of the NQDC plan. As a result, an NQDC plan may provide for a cancellation of the individual’s deferral election or such a cancellation may be made due to a CRD.

The notice cautions that the deferral election must be cancelled, not merely postponed or otherwise delayed.

Plan Amendment Deadlines

Non-governmental plans have until the last day of the first plan year beginning on or after January 1, 2022 to amend their plans to permit CRDs. This is December 31, 2022, for calendar year plans. Governmental plans have until the last day of the first plan year beginning on or after January 1, 2024: that is, December 31, 2024, for calendar year governmental plans.


The new IRS guidance is welcome news for retirement plan sponsors, and their service providers, as it clarifies a number of uncertainties in the CARES Act regarding plan distributions and plan loans. In short, Notice 2020-50’s expanded definition of QIs will allow more retirement plan participants affected by COVID-19 to take advantage of the CARES Act provisions that provide enhanced access to plan distributions and plan loans.

Please contact a member of Ballard Spahr’s Employee Benefits and Executive Compensation Practice Group for further information.

Copyright © 2020 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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