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Self-certification of Coronavirus-related distributions and plan loans

Plan sponsors can rely on participants to ‘self-certify’ they are qualified individuals who are eligible to take advantage of special rules for Coronavirus-related distributions (CRDs) and plan loans. Can you explain what it means to self-certify? Is a plan sponsor required to obtain formal documentation?

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Massachusetts is representative of a common inquiry related to self-certification.

Highlights of the Discussion

The IRS explained what self certification for purposes of CRDs and plan loans means in IRS Notice 2020-50, Section 2 E.

The administrator of an eligible retirement plan may rely on an individual’s certification that the individual satisfies the conditions to be a qualified individual in determining whether a distribution is a coronavirus-related distribution, unless the administrator has actual knowledge to the contrary.

The notice goes on to explain that having “actual knowledge to the contrary” does not mean the plan administrator must inquire whether an individual has satisfied the conditions to be a qualified individual, but need only possess information that is sufficiently accurate to judge the certification as truthful.

While the notice did not specify that the certification be “in writing,” retaining evidence of the certification is part of a good plan governance and administration process. To that end, the IRS included an example of an acceptable certification on pages 9 and 10 of Notice 2020-50 (reproduced below).

Name: _______________________ (and other identifying information requested by the employer for administrative purposes).

I certify that I meet at least one of the following conditions: (1) I was diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (referred to collectively as 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); (2) my spouse or my dependent was diagnosed with 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 (3) I have experienced adverse financial consequences because: (i) I, my spouse, or a member of my household was quarantined, furloughed or laid off, or had work hours reduced due to COVID-19; (ii) I, my spouse, or a member of my household was unable to work due to lack of childcare due to COVID-19; (iii) a business owned or operated by me, my spouse, or a member of my household closed or reduced hours due to COVID-19; or (iv) I, my spouse, or a member of my household had a reduction in pay (or self-employment income) due to COVID-19 or had a job offer rescinded or start date for a job delayed due to COVID-19.

Signature: ______________________

The above certification, or one similar to it, can be used to authorize the

  • Taking of a CRD;
  • Recontribution (or rollover) of a CRD within three years to an eligible retirement plan; and
  • Application of the special rules for coronavirus-related loans.

If a plan offers CRDs, accepts CRD rollovers and/or applies the special rules for coronavirus-related plan loans, the sponsor should check with its recordkeeping service providers to verify appropriate procedures related to the self-certification process are in place.

Conclusion

While not required to do so, qualified retirement plans can offer CRDs and implement special coronavirus-related loan rules. Only qualified individuals may take advantage of these temporary rules if their work-place retirement plan offers them. To ease the determination as to whether a person is a qualified individual, plan sponsors can follow the self-certification guidance of IRS Notice 2020-50.

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Qualified plan loans and Coronavirus-related distributions

If a qualified plan participant defaults on a plan loan, can he/she treat the distribution as a Coronavirus-Related Distribution (CRD), even if the plan does not offer CRDs?”  

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Arizona is representative of a common inquiry related to CRDs.

Answer:  Potentially, if there is a loan offset.  If a retirement plan reduces, or offsets, a participant’s account balance by the unpaid portion of a defaulted loan, the IRS considers such amount an actual distribution, which could be treated as a CRD, provided the plan participant otherwise meets the definition of a CRD-qualified individual. (See definition below). A recipient of a CRD can take advantage of special tax rules that allow him/her to pay back the amount within three years (2020, 2021 and 2022); and/or spread the taxation of any amounts retained over three years. Loans treated as “deemed distributions” may not qualify as CRDs (Notice 2020-50).

When a participant fails to meet the repayment requirements of a plan loan and cannot payoff the loan in full, the loan is in default. The plan administrator must handle the outstanding loan balance in one of two ways: 1) as a loan offset or 2) as a deemed distribution.

Loan offset

A loan offset occurs when, in conjunction with the loan default, a participant has a distribution triggering event under the terms of the plan. In this case, the plan administrator will use the participant’s remaining account balance to pay off (offset) the loan amount. The plan reports the offset on IRS Form 1099-R; coded as an actual distribution based on the age of the recipient, and uses special code M to signify “loan offset.”

The IRS considers a loan offset as an eligible rollover distribution, assuming the recipient can come up with the amount out of pocket to complete the rollover in a timely manner. Further, if the plan loan offset is due to plan termination or severance from employment, instead of the usual 60-day rollover period, the individual has until the due date, including extensions, for filing his/her Federal income tax return to complete the rollover. IRS Notice 2020-50 confirms that an offset of a qualified individual’s plan account balance in order to repay a plan loan is permitted to be treated as a CRD, if the recipient is otherwise eligible, regardless of whether the plan allows for CRDs.

EXAMPLE

As a result of a workforce reduction, Cameron was let go from his employer. He has an outstanding 401(k) plan loan which he cannot pay back at this point. Since Cameron has a distribution trigger (i.e., separation from service) the plan administrator will offset his account balance by the outstanding loan amount, and report the distribution on Form 1099-R using code M. Cameron is CRD-eligible, but his 401(k) plan does not allow CRDs. Nonetheless, the IRS allows Cameron to treat the loan offset as a CRD, and take advantage of the special three-year tax treatment rules.

Loan as deemed distribution

In contrast, a deemed distribution of a loan balance occurs when a participant does not have a distribution triggering event under the terms of the plan at the time of the loan default, and no other way to pay back the loan. In this situation, the plan reports the loan amount as distributed using a special code “L” for deemed distribution on Form 1099-R. The participant must include the deemed distribution in taxable income for the year; subject to an early distribution penalty tax (unless an exception applies). A deemed distribution cannot be treated as a CRD, and is not eligible for rollover.

Who qualifies for a CRD?

The definition of a CRD-qualified individual was updated as a result of IRS Notice 2020-50 to include

1)   An individual, his or her spouse, beneficiary or a dependent who is officially diagnosed with COVID– 19;

2)   An individual, his or her spouse, beneficiary or member of the household (i.e., someone who shares the individual’s principal residence) who experiences adverse financial consequences as a result of Covid-19 because of

  • Furlough,
  • Lay off,
  • Job offer rescission;
  • Start date delay;
  • Reduced work hours or pay (including self-employment income);
  • Lack of child care, or
  • A closure or reduction in the hours of a business owned or operated by the individual.

Conclusion

Pursuant to Notice 2020-50, CRD-qualified individuals who experience a loan offset may treat such amounts as CRDs, regardless of whether the plan offers CRDs. Deemed distributions of defaulted loans, in contrast, may not be treated as CRDs, and are not eligible for rollover.

© Copyright 2020 Retirement Learning Center, all rights reserved
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“How did beneficiary distribution options change under the SECURE Act?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Massachusetts is representative of a common inquiry related to beneficiary distribution options.

Highlights of the Discussion

The Setting Every Community Up for Retirement Enhancement (SECURE) Act provisions that Congress added to the Further Consolidated Appropriations Act, 2020, affected the distribution options for retirement plan beneficiaries in 2020 and beyond. The changes are summarized in the charts below.

Beneficiary Changes under the SECURE Act

Applies to distributions with respect to individuals who die after December 31, 2019

Refer to the terms of the plan or IRA agreement for specify options.

Type of Beneficiary Definition Distribution Options
Eligible Designated Beneficiary (EDB)
  • Spouse
  • Disabled or chronically ill individuals
  • Individuals who are not more than 10 years younger than the employee (or IRA owner), or
  • Children of the employee (or IRA owner) who have not reached the age of majority
Terms of the plan or IRA agreement will specify, but  generally:

Death before required beginning date (RBD)

•     Five-year rule

•     Single life expectancy payments

•     Lump sum

•     IRA transfer to own IRA “treat as own” (spouse beneficiary only)

•     Rollover

  • Spouse EDB may roll over his or her share from an IRA or qualified plan into his/her own IRA or eligible plan
  • Non-spouse EDB may roll over his or her share of an employer plan to a beneficiary IRA

Death on or after RBD

•     Single life expectancy payments

•     Lump sum

•     IRA transfer to own IRA “treat as own” (spouse EDB only)

•     Rollover (see above)

Noneligible Designated Beneficiary (Non-EDB) Nonspouse beneficiaries who do not qualify as an EDB as listed above (e.g., child who has reached the age of majority) Terms of the plan or IRA agreement will specify, but generally:

•     Timing of death does not matter (i.e., no before or after RBD differentiation)

•     10-year rule—account depleted within 10 years of death

•     Lump sum

•     Rollover−nonEDB may roll over his or her share of an employer plan to a beneficiary IRA, but payout remains subject to 10-year rule

 

Estate or nonqualified trust as beneficiary Nonperson beneficiaries Death before RBD

•   Lump sum

•   Five-year rule

Death on or after RBD

•   Lump sum

•   Single life expectancy payments

 

Qualified trust as beneficiary with underlying EBD A qualified trust is one that meets the following requirements of Treas. Reg. 1.401(a)(9)-4, Q&A 5(b).

1.   The trust is valid under state law,

2.   The trust is irrevocable (either during the IRA owner or plan participant’s

life or becomes so at his or her death),

3.   The trust has identifiable beneficiaries, and

4.   The trustee of the trust provides the IRA or plan administrator with a copy of the trust instrument (or qualifying trust documentation) by October 31 of the year following the year of the IRA owner or plan participant’s death.

EDB—See above

Death before RBD

·    Lump sum

·    Five-year rule

·    Single life expectancy payments

Death on or after RBD

·     Lump sum

·     Single life expectancy payments

·      Rollovers-

  • Spouse EDB rollover only allowed with private letter ruling
  • Nonspouse EDB may roll over his or her share of an employer plan to a beneficiary IRA with the trust named as beneficiary
Qualified trust as beneficiary with underlying Non-EDB Qualified trust—See above

Non-EDB—See above

Timing of death does not matter (i.e., no before or after RBD differentiation

•   10-year rule

•   Lump sum

•   Rollover−Non-EDB may roll over his or her share of an employer plan to a beneficiary IRA with the trust named as beneficiary, but payout remains subject to 10-year rule

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Reducing or Suspending 401(k) Safe Harbor Contributions Mid-Year under Notice 2020-52

An advisor calling RLC’s Resource Desk recently asked the following questions:  “My client is a business owner and has a standard 401(k) safe harbor plan.  Under what circumstances, if any, may he reduce or eliminate the company’s mandatory safe harbor contribution during the plan year? Is there any relief granted because of the impact of Covid-19?”   

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Washington is representative of a common inquiry related to 401(k) safe harbor plans.

Highlights of the Discussion

The following outlines the circumstances under which sponsors of 401(k) [and 403(b)] safe harbor plans may reduce or eliminate employer safe harbor contributions mid-year under normal circumstances, and under the special circumstances outlined in IRS Notice 2020-52 granted as a result of the Covid-19 pandemic.

Under normal circumstances, and according to final Treasury Regulations, a sponsor of a 401(k) safe harbor plan may amend the plan during the current year to reduce or suspend the company’s safe harbor contribution—either the matching or nonelective contribution—under the following limited circumstances.

A removal or reduction of a safe harbor contribution mid-year is permitted if the employer either

  1. Is operating under an economic loss for the year (See Internal Revenue Code Section (IRC 412(c)(2)(A);[1]

or

  1. Included a statement in the safe harbor notice given to participants before the start of the plan year that the employer
  • May reduce or suspend contributions mid-year;
  • Will give participants a supplemental notice (described below) regarding the reduction or suspension; and
  • Will not reduce or suspend employer contributions until at least 30 days after receipt of the supplemental notice.

COVID-19 Relief Any Plan Amended Between March 13, 2020, and August 31, 2020

Any sponsor of a safe harbor plan may amend its plan between March 13, 2020, and August 31, 2020, to reduce or suspend safe harbor contributions (either match or nonelective) without condition. However, special rules related to the supplemental notice apply as explained next.

Supplemental Notice

Typically, if a reduction or suspension of safe harbor contributions will occur, a 30-day advance notice rule applies. This supplemental notice must explain 1) the consequences of the suspension or reduction of contributions; 2) how participants may change their deferral elections as a result; and 3) when the amendment takes effect.

COVID-19 Relief for Supplement Notice for Nonelective Contributions

Sponsors who reduce or suspend 401(k) safe harbor nonelective contributions will satisfy the 30-day supplemental notice requirement, provided the sponsor

  • Gives the notice to employees no later than August 31, 2020, and
  • Adopts the required plan amendment no later than the effective date of the reduction or suspension of safe harbor nonelective contributions.

There is no relief on the timing of the supplemental notice under Notice 2020-52 for sponsors who reduce or suspend safe harbor matching contributions. Sponsors must give 30 days notice via a supplemental notice to participants before the reductions can take place.

Other Procedural Requirements

Typically, an employer that suspends or reduces safe harbor contributions must also

  1. Give participants a reasonable opportunity after they receive the supplemental notice and before the reduction or suspension of employer contributions to change their contribution elections;
  2. Amend the plan to apply the actual deferral percentage (ADP) and/or actual contribution percentage (ACP) Tests for the entire plan year; and
  3. Allocate to the plan any contributions that were promised before the amendment took effect.

Additional Notice 2020-52 Relief: Mid-Year Safe Harbor Contribution Reductions for Highly Compensated Employees

Pursuant to Notice 2020-52, a plan sponsor may choose to reduce or suspend 401(k) safe harbor contributions for highly compensated employees (HCEs) alone. In such cases, the plan sponsor must provide an

  • Updated safe harbor notice and
  • Opportunity for participants to update their elections, determined as of the date of issuance of the updated safe harbor notice.

Conclusion

In the past, the ability of sponsors to amend their 401(k) [or 403(b)] safe harbor plans to reduce or suspend employer matching or nonelective safe harbor contributions mid-year was limited. The IRS expanded those opportunities under IRS Notice 2020-52 in order to provide relief in light of the Covid-19 pandemic.

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