We are pleased to return to the topic of section 2202 of the CARES Act. For previous discussion of section 2202, see Part I - Coronavirus-Related Distributions and Part II - Loans of our Coronavirus relief series.
On June 19, 2020 the IRS released Notice 2020-50. This notice takes advantage of the provision in the CARES Act which permits the Treasury Department to provide additional factors to consider when determining who is a qualified individual for purposes of Coronavirus-related distributions and loans. The notice additionally provides some clarification on certain issues related to section 2202, including the suspension of loan payments for a qualified individual.
New Qualifying Factors
The text of the CARES Act provides that an individual is eligible for the special distribution and loan provisions if they suffered “adverse financial consequences” due to COVID-19. These consequences include being quarantined, being furloughed or laid off, being unable to work due to lack of childcare, a reduction in hours worked, or the closing or reduction in hours of operation of a business that they owned. However all of these only applied to the participant themselves. Notice 2020-50 expanded all of these factors to also include the individual’s spouse, and members of their household (defined as anyone sharing the same principal residence).
In addition, two entirely new qualifying factors were added. An individual is now qualifying if they, their spouse or member of their household experienced a reduction in pay or self-employment income due to COVID-19. An individual is also now qualifying if they, their spouse or member of their household had a job offer rescinded or start date delayed due to COVID-19.
To recap, a qualifying individual is one:
Who is diagnosed with SARS-CoV-2 or the coronavirus disease 2019 (collectively referred to as "COVID-19");
Whose spouse or dependent is diagnosed with COVID-19; or
Who experiences adverse financial consequences as a result of any of the following, or whose spouse or a member of whose household experiences adverse financial consequences as a result of any of the following due to COVID-19:
Being quarantined, laid off, or furloughed;
Having work hours reduced;
Being unable to work due to lack of child care;
Closing or reduction in hours of operation of a business that they own;
Reduction in pay or self-employment income; or
Having a job offer rescinded, or start date delayed.
Participant Self-Certification of Qualifying Status
The IRS reaffirmed in Notice 2020-50 that a Plan Administrator may rely upon a participant’s certification that they meet the definition of a qualified individual when determining whether to allow a coronavirus-related distribution or loan. However, they may not rely upon the participant’s certification if they have actual knowledge to the contrary. The Plan Administrator is not required to investigate the veracity of the participant’s claim; they would only be required to deny it if they already possessed knowledge contradicting the claim.
The IRS also clarified that while the Plan Administrator may rely upon the certification without verifying it, the participant is not entitled to treat the distribution as a coronavirus-related distribution on their personal tax return (with respect to the waiver of the excise tax under sec. 72(t) and the spread of income over a 3-year period) unless they actually are a qualified individual.
Suspension of Loan Payments
One of the more puzzling pieces in the text of section 2202 regards the suspension of loan payments. There was some confusion because the wording of the Act permits a qualified individual to suspend, for a one year period, loan payments which were scheduled to be due between March 27, 2020, and December 31, 2020. This is unclear because although it says payments are suspended for one year, the range of dates for which it says payments may be suspended is itself less than one year. So the question is, what happens at the end of the year?
For example, if a payment was originally due on March 31, 2020, and was delayed for one year, it would now be due March 31, 2021. However, there was no suspension permitted in the law for a payment due in January 2021. If payments are required to begin in January, then the participant did not have their payments suspended for one year as the law seems to require.
Furthermore, the Act says that the original term of the loan will be extended by the length of the suspension period. If payments resume 9 months after the suspension, is the term extended by 9 months or by the 1 year referenced in the Act?
Notice 2020-50 provides a safe harbor method for compliance with this section. Under the safe harbor, the suspension period must end on December 31, 2020 and payments must resume after that date, however the original term of the loan is extended by 1 year. The outstanding balance of the loan as of the beginning of the suspension period must be increased for interest through the end of the year, then amortized into level payments for the remainder of the term (including the 1 year extension).
The notice also recognizes that there may be other ways to comply with the loan suspension provision of the CARES Act, however they may be more complex than the safe harbor method. For example, the payments beginning in January 2021 may be made as originally scheduled, and then increased payments may be required to begin only starting on the anniversary of the original suspension date. In this case, the outstanding balance would be computed as of the 1-year anniversary of the start of the suspension period, taking into account accrued interest during the suspension period, but also taking into account the payments made between January 1, 2021 and the anniversary date. That balance would then be amortized into level payments over the remaining term of the loan, including a 1-year extension.
In any case, it is clear that repayments must begin again on the first repayment date after December 31, 2020. It is not permissible to wait until one full year after the loan suspension date to begin repayments.
Other Items
The notice grants that, for a participant in a Section 409A Nonqualified Deferred Compensation Plan, if the participant receives a Coronavirus-Related Distribution from an eligible retirement plan, that distribution will be considered a hardship distribution for purposes of permitting a cancellation of the participant’s deferral election under the nonqualified plan. The election may only be cancelled, not postponed or delayed.
The notice also discusses the impact on various individual income tax scenarios of making repayments of Coronavirus-related distributions. Since these affect individual tax planning, and not retirement plan design or administration, they have not been covered here. However, if you have questions about it, or anything else related to the CARES Act, please don’t hesitate to contact us.