Locke Lord QuickStudy: IRS Issues Helpful Guidance for Coronavirus-Related Distributions and Loans from Retirement Plans Under The Cares Act

Locke Lord LLP
June 26, 2020

The Internal Revenue Service (IRS) recently issued Notice 2020-50 which provides helpful guidance for plan sponsors and plan participants who wish to take advantage of the enhanced distribution and loan provisions under the Coronavirus Aid, Relief and Economic Security Act (CARES Act).


As described in our earlier Quickstudy, the CARES Act allows qualified individuals to take coronavirus-related distributions (CRDs) and relaxes certain loan requirements.  Generally, qualified individuals may take CRDs of up to $100,000 from their qualified defined contributions plans (e.g., 401(k) or 403(b) plans) or IRAs between January 1, 2020 and December 31, 2020 without such distributions being subject to the 10% additional tax on early distributions prior to age 59-½.  CRDs can be included in income ratably over a three-year period and to the extent the CRD is eligible for tax-free rollover treatment, individuals have three years to recontribute some or all of the CRDs to a plan or IRA and undo the tax consequences of amount of the distribution that is recontributed.

In addition, the CARES Act permits plans to increase the dollar limit on plan loans made to qualified individuals between March 27, 2020 and September 22, 2020 from $50,000 to $100,000 and suspends loan repayments that are due from March 27, 2020 through December 31, 2020.


Under the CARES Act, a “qualified individual” who may receive CRDs is an individual:

  • who is diagnosed, or whose spouse or dependent is diagnosed, with COVID-19 by a test approved by the CDC (including a text authorized under the Federal Food, Drug and Cosmetic Act); or
  • who experiences adverse financial consequences as a result of:
  • being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19;
  • being unable to work due to lack of childcare due to COVID-19;
  • closing or reducing hours of a business owned or operated by THE individual due to COVID-19.

Notice 2020-50 expands the definition of “qualified individual” to include an individual who experiences adverse financial consequences as a result of:

  • the individual, the individual’s spouse or member of the individual’s household having a reduction in pay (or self-employment income) due to COVID-19;
  • the individual, the individual’s spouse or member of the individual’s household having a job offer rescinded or start date for a job delayed due to COVID-19;
  • the individual’s spouse or member of the individual’s household being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19,
  • the individual’s spouse or member of the individual’s household being unable to work for lack of childcare due to COVID-19; or
  • closing or reducing hours of a business owned or operated by the individual’s spouse or member of the individual’s household.

A member of the individual’s household is someone who shares the individual’s principal residence.


The Notice confirms that periodic payments and distributions that would have been required minimum distributions but for the CARES Act waiver of such distributions can be treated as CRDs, as well as distributions received by a qualified individual as a beneficiary and loan offset amounts.  However, amounts that are not “eligible rollover distribution” cannot be treated as CRDs.  This would include “deemed distributions” of default loans, distributions or refunds of excess elective deferrals under Code Section 402(g), automatic enrollment withdrawals under an EACA, ESOP dividends, costs of current life insurance, prohibited allocations treated as deemed distributions under Code Section 409(p) and distributions for accident or health insurance premiums.

Notice 2020-50 clarifies that CRDs are not limited to amounts withdrawn solely to meet a need arising from COVID-19.  A qualified individual may take a CRD without regard to the individual’s need for the funds and the amount of the distribution is not required to correspond to the extent of the adverse financial consequences experienced by the qualified individual.

Notice 2020-50 explains that an employer can choose whether to amend its retirement plans to permit CRDs and notes that a qualified individual may treat a distribution as a CRD when filing their own income tax return even if the plan is not amended to permit CRDs.


Notice 2020-50 defines an eligible retirement plan to include an individual retirement arrangement ‎‎(IRA) under § 408(a) or (b), a qualified plan under § 401(a), an annuity plan under § 403(a), a § ‎‎403(b) plan, and a governmental deferred compensation plan under § 457(b). However, Section ‎‎2202 of the CARES Act does not change the rules regarding when a distribution is permitted to be ‎made from an employer retirement plan. For example, a qualified pension plan (defined benefit ‎plan or money purchase pension plan) is not permitted to make a distribution before an otherwise ‎permitted distributable event merely because the distribution, if made, would qualify as a CRD. ‎Additionally, a qualified pension plan is not permitted to make a distribution in a form other than a ‎qualified joint and survivor annuity without spousal consent, even though such distribution, if ‎made, could be treated as a CRD. ‎


Notice 2020-50 clarifies that while Section 2203 of the CARES Act provides that no minimum ‎distributions under § 401(a)(9) are required for 2020 by qualified defined contribution plans (e.g., ‎‎401(k) or 403(b) plans) or IRAs, defined benefit pension plans remain subject to the required ‎minimum distribution rules.‎


The CARES Act provides that the administrator of an eligible retirement plan may rely on an employee’s certification that they are a qualified individual unless the administrator has “actual knowledge” to the contrary.  Notice 2020-50 provides a sample notification to be signed by the individual claiming to be a qualified individual and clarifies that a plan administrator may rely on this certification unless the administrator “already possesses sufficiently accurate information to determine the veracity of the certification.”


CRDs can be recontributed to an eligible retirement plan at any time during the three-year period after the date on which the CRD was received.  Any recontributions will be treated as rollover contributions.  To address plan administrators’ concerns about whether the acceptance of invalid recontributions will affect the plan’s qualified status, the Notice sets out relief similar to the relief provided to rollover contributions.  If a plan accepts an invalid recontribution, the recontribution will be treated as a valid rollover contribution provided that the plan administrator reasonably concludes that the recontribution is eligible for direct rollover treatment.  The Notice confirms that a plan administrator may rely on an individual’s certification that the individual is a qualified individual in determining whether the distribution is a CRD.


Notice 2020-50 provides a safe harbor for satisfying the plan loan suspension rules.  Under the safe harbor, plan loan repayments may be suspended through December 31, 2020.  Loan repayments must resume at 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.  After the suspension period, the loan (including any additional interest that accrued during the suspension period) can be reamortized and repaid in substantially level installments over the remaining period of the original loan (that is, for a loan not for a principal residence, five years from the date of the loan plus up to one year from the date the loan was originally due to be repaid.  This 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.       


Generally, a nonqualified deferred compensation plan (NQDC) may allow employees and other service providers to cancel their deferral election due to an unforeseeable emergency or a hardship distribution under the 401(k) plan rules. The Notice clarifies that NQDC plans may treat CRDs as hardship distributions, and provide for the cancellation of a deferral election due to a CRD.  The Notice emphasizes that the deferral election must be cancelled and not merely postponed or delayed.

Organizations that plan for their recovery and are rebuilding for the future will be better positioned for a post-pandemic world. Please visit our Adapt. Adjust. Advance. Resource Center often for up-to-date information on navigating these and other important legal considerations in the postpandemic reality.