The Internal Revenue Service (IRS) issued Notice 2020-50 on Friday, June 19, 2020. This notice is certainly welcomed by those in the retirement account industry as it provides guidance on making distributions and taking participant loans under the CARES Act
While the The IRS will continue to release more guidance on this important act, here are some of the pertinent items addressed in Notice 2020-50.
Review of IRS Notice 2020-50 Released on June 19, 2020
Distributions: This latest notice has updated the list of qualified COVID-19 related distributions from IRAs and 401k plans including solo 401k plans. Essentially, the IRS defined what falls under “other factors as determined by the Treasury Secretary.” Here is the guidance:
- The individual has a reduction in pay (or self-employment income) due to COVID-19 or has a job offer rescinded or start date for a job delayed due to COVID-19
- Due to COVID-19, the individual’s spouse or a member of the individual’s household (defined as someone who shares the individual’s principal residence) is quarantined, furloughed or laid off, has work hours reduced, is unable to work because of lack of childcare, has a reduction in pay (or self-employment income), or has a job offer rescinded or start date for a job delayed
- A business owned or operated by the individual’s spouse or a member of the individual’s household is forced to close or reduce hours due to COVID-19
Types of COVID-19 Tests Defined
The notice also clarifies the types of acceptable COVID-19 diagnose tests:
Types of Distributions that Do Not Fall Under a Coronvavirus Related Distribution (CRD)
Notice 2020-50 Timing of Distributions
In order to qualify as a coronavirus related distribution (CRD), the distribution must be taken between January 1, 2020 and December 30, 2020. Notice 2020-50 affirmed that a distribution taken on December 31, 2020, would not be a CRD.
Form 1099-R Reporting
CRDs will be reported on IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc. Notice 2020-50 states that for CRDs made to participants (other than beneficiaries) who are otherwise subject to the 10 percent early solo 401k distribution penalty tax, Code 2, Early distribution, exception applies, may be used. Alternatively, Code 1, Early distribution, no known exception, may be used. (A qualified individual can claim exemption from the 10 percent penalty tax on his individual income tax return if he qualifies for a CRD, regardless of how Form 1099-R is coded.)
Reporting by the Participant
The IRA or the solo 401k participant will use Form 8915E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments to both report the CRD and the repayment of the distribution. This form is the one generally used for disaster events (Hurricane Katrina, for example).
Notice 2020-50 Covers Participant 401k Loans
Notice 2020-50 also confirms that the final day to process a COVID-19 related solo 401k participant loan is September 22, 2020 not September 23,2020.
Whether a full-time employer 401k or a a self-employed solo 401k plan, the new notice confirms the increase in the loan amount from $50,000 to $100,000 under a COVID-19 exception for loans taken on or after March 27, 2020, and ending on December 31, 2020. The notice also clarifies the 1 (one) year suspension of participant loan payments on new loans and existing loans.
One of the most important clarifications under IRS Notice 2020-50 is that 401k loan defaults are not eligible to be considered a coronavirus related distribution (CRD) under the CARES Act.
More CARES Act Information
Spreading the Income Tax Over 3 Years