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The COVID-19 pandemic created a heightened level of uncertainty because of the lack of information about symptoms, treatments, and prevention. The initial increase in cases and general fear of contraction resulted in the well-documented forced business closures and stay at home orders. Not only did this leave many businesses helpless to operate, but it also left their employees facing the genuine potential of being terminated, laid off or furloughed. Given the depth of the challenge, Congress passed the CARES Act, which offered a broad range of economic relief, including the introduction of Coronavirus Related Distributions. This new type of distribution was designed to provide qualifying participants access to retirement plan savings to manage. One important feature is that participants are not required to pay the 10% additional taxes on early distributions. These distributions have been essential to helping those facing coronavirus related expenses. In June, the IRS issued Notice 2020-50, which expands eligibility criteria. To help clients, prospects, and others, JLK Rosenberger has provided a summary of key points below.
Existing Eligibility Criteria Highlights
The original eligibility criteria have not been changed and focused mainly on the impact of COVID-19. Below is a list of the existing criteria.
- An individual who has been diagnosed with the virus SARS-CoV-2 or with COVID-19 using a test approved by the CDC.
- An individual whose spouse or dependent has been diagnosed with the virus SARS-CoV-2 or with COVID-19 using a test approved by the CDC.
- An individual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19.
- An individual who experiences adverse financial consequences as a result of being unable to work due to lack of childcare due to SARS-CoV-2 or COVID-19.
- Finally, an individual who experiences adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.
Criteria Expansion Highlights
Under the recently issued guidance, eligibility criteria have been expanded to account for additional factors such as reductions in pay, rescinded job offers, and delayed employment start dates. It also provides relief for those facing financial consequences from the impact of COVID-19 on an individual’s spouse or household member. Below is a list of the expanded eligibility criteria.
- An individual whose spouse or dependent is diagnosed with the virus SARS-CoV-2 or COVID-19 through a testing process approved by the CDC.
- When an individual experiences adverse financial consequences as a result of COVID-19, the individual, their spouse, or another member of the household, is in one of the following situations.
- When an individual is placed in quarantine, is furloughed or laid off, or work hours reduced due to COVID-19.
- Experiences the inability to work because of a lack of childcare services due to COVID-19.
- Employers have been ordered to close or reduce the operating hours due to COVID-19.
- Experiences a reduction in self-employment income due to COVID-19.
- Finds out a job offer has been rescinded, or the start date has been delayed due to COVID-19.
The guidance now permits employers to rely on an individual’s certification to meet the criteria necessary to be considered eligible and therefore receive a Coronavirus Related Distribution.
Other Important Guidance
It is important to remember that employers are not required to adopt the distribution and loan rules outlined in the CARES Act. As a result, a plan administrator may offer coronavirus-related distributions but elect not to change plan loan provisions or repayment schedules. In this case, even if an employer does not treat the distribution as coronavirus-related, the plan participant can still treat a distribution that meets the proper criteria as coronavirus-related on their federal IRS Form 1040.
The expanded eligibility criteria provide additional opportunities for those impacted by COVID-19 to obtain financial relief from their retirement plan savings. It is also important for plan sponsors to be aware of the change, especially if this type of distribution is offered. If you have questions about the information outlined above or need assistance with another concern, JLK Rosenberger can help. For additional information, call us at 949-860-9902 or click here to contact us. We look forward to speaking with you soon.