IRS Expands and Clarifies CARES Act Distribution Rules

By Suzanne G. Odom and Kathryn W. Wheeler, CEBS on June 25, 2020

Since March 27, 2020 when the CARES Act was signed into law, many questions have mounted related to implementing the retirement plan provisions. Now, with roughly 3 months under our belts since the issuance of the Act and countless CARES Act distributions and loan suspensions processed, the IRS clarified several eligibility, administrative, and taxation reporting rules by issuing IRS Notice 2020-50. The Notice provides safe harbors, a model certification, and information reporting codes. It is a must-read for those responsible for administering employer-sponsored retirement plans. We discuss the basics of the CARES Act in an earlier article.

Coronavirus-Related Distributions

The CARES Act authorized eligible retirement plans to offer for a limited time a new type of distribution, a Coronavirus-Related Distribution (CRD), which is afforded special tax treatment. Only Qualified Individuals (QI) are eligible for a CRD. Significantly, the Notice expands the definition of a QI under Section 2202 of the CARES Act to include individuals whose:

Pay was reduced because of COVID-19, including self-employment income;
Job offer was rescinded or postponed;
Spouses’ or other household members (someone who shares the individual’s principal residence) experience a COVID-19 related adverse financial consequence, including the closing or reducing of hours of a business they own and operate.

The CARES Act allows employers to rely on an employee’s certification, barring any actual knowledge to the contrary, of being a QI when requesting a CRD. Administrators do not have a duty to investigate. Instead, actual knowledge is present only when the administrator already knows facts to determine the truthfulness of the certification. The Notice provides sample language of an acceptable certification for employers and individuals to use for documentation.

The Notice clarifies the types of distributions that qualify as CRD, noting that even distributions to beneficiaries, required minimum distributions, and plan loan offset amounts can qualify. A QI may consider a distribution to be a CRD for personal tax reporting even if the plan does not. But the Notice explicitly excludes certain distributions from designation as a CRD, including:

Corrective distributions of elective deferrals;
Loans treated as deemed distributions;
Dividends on employer securities;
Distributions from an eligible automatic contribution arrangement.

The Notice also clarifies that an employer may expand options for CRDs to include sources that ordinarily are not permitted without a distributable event or reaching age 59 ½. Examples of these sources include qualified nonelective or qualified matching contributions. However, the Notice reminds employers that the CARES Act does not change the distribution rules normally applicable to plans, noting for example that pension plans and money purchase pension plans cannot permit distributions before a permissible distribution event, even if it would qualify as a CRD.

Unlike other need-based distributions, e.g., hardship distributions, the amount a QI requests as a CRD need not correspond to an actual amount of need. But the eligible retirement plan and any related plans are limited to an aggregate amount of $100,000 for a CRD to anyone QI.

CRDs are not subject to the 10% early withdrawal penalty, reportable as gross income over 3 years and most may be recontributed and treated as a rollover contribution over a 3-year period to an eligible retirement plan that accepts rollovers. Notice 2020-50 clarifies how to treat a CRD for tax purposes and provides specific codes an administrator should use in box 7 of the Form 1099-R.

Recontributions of CRD

A QI may recontribute a CRD as a rollover contribution over 3 years to an eligible retirement plan that accepts rollovers. The Notice explains how a CRD may be recontributed, even for distributions not normally eligible for rollover. The Notice identifies one situation, any CRD paid to a QI as a beneficiary of an employee, where a QI may not recontribute a CRD. The employer may also rely on the individual’s certification of satisfaction of the QI requirements when determining the status of a CRD as eligible for recontribution.

A plan that does not accept rollovers need not accept recontributions of CRDs. Instead, the decision of whether to amend a retirement plan to implement these CARES Act provisions is at the discretion of the employer.

Loans

Among other plan loan changes, the CARES Act allows certain loan repayments due by QI to be suspended. The Notice provides a safe harbor for implementing these plan loan suspension rules. The safe harbor applies if the loan is re-amortized after the suspension period (which must not end later than December 31, 2020) over the remaining period of the loan plus 1 year. Interest accruing during the suspension period must be included in the re-amortized payments.

The Notice acknowledges there are other reasonable, and perhaps more complicated, ways to implement the CARES Act plan loan suspension provisions. The safe harbor is not the only option available.

Required Minimum Distributions

The SECURE Act raised the beginning age for Required Minimum Distributions from 70 ½ to 72. The CARES Act waived the requirement that an individual receive the distribution in 2020. Individuals may elect to not receive their Required Minimum Distribution in 2020. The Notice provides that a QI eligible to receive a Required Minimum Distribution may elect to receive the distribution and consider it a CRD on their individual tax return, which would allow the individual to include the amount in gross income over 3 years. But these distributions are not eligible for recontribution into an eligible retirement plan.

Cancellation of 409A Deferral Elections

The adverse financial effects of the COVID-19 pandemic have not been limited to only certain factions of the workforce. The Notice acknowledges that those participating in nonqualified deferred compensation plans also may experience financial challenges. It provides that an individual qualifying for a CRD will be treated as having received a hardship distribution for purposes of the regulations implementing Section 409A of the tax code, enabling service providers to cancel nonqualified deferred compensation plan deferral elections if the plan so permits.

We are available to help plan administrators understand the new guidance. Please contact a team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

IRS Issues Proposed Regulations for Tax-Exempt Organizations Paying Excess Executive Compensation

By Suzanne G. Odom and Melissa Ostrower on June 22, 2020

The IRS issued proposed regulations under Section 4960 of the Internal Revenue Code of 1986, as amended (the “Code”), which was added as part of the Tax Cuts and Jobs Act. The proposed regulations published in the Federal Register on June 11, 2020, largely follow the IRS interim guidance under IRS Notice 2019-09. However, the IRS made some helpful changes in the proposed regulations which are briefly summarized below.

By way of background, Section 4960 imposes an excise tax equal to the corporate tax rate (21 percent for 2020) on that portion of a covered employee’s pay that exceeds $1 million or is treated as an excess parachute payment. The tax applies to an applicable tax-exempt organization (called an “ATEO”) or a related organization paying excess remuneration to a covered employee. The tax also applies to an ATEO’s payment of an excess parachute payment.

New Exceptions Under the Definition of a Covered Employee

Generally, under the proposed regulations, an employee is treated as a covered employee if he or she is one of an ATEO’s five highest-compensated employees, including pay from related organizations. Once an employee meets the definition of a covered employee, the employee is always a covered employee (even if the employee ceases to be one of the top five highest compensated employees or terminates employment).

However, the proposed regulations add several exceptions made in response to concerns that if a highly paid officer of a for-profit business provided volunteer services to a related ATEO, the for-profit business could find itself subjected to an allocable portion of the excise tax.

When identifying the five highest compensated employees, the proposed regulations specify that ATEOs can exclude employees meeting one of the three following exceptions:

Limited Hours Exception: This exception applies if 10% or less of the employee’s services are for the ATEO and all related ATEOs, and the ATEO pays no compensation (including granting deferred compensation, whether vested or unvested) for the services. The proposed regulations also include a “safe harbor” under which an employee who performs fewer than 100 hours of services as an employee of an ATEO (and all related ATEOs) during a year is deemed to have worked less than 10 percent of the employee’s total hours for the ATEO (and all related ATEOs).

Nonexempt Funds Exception: The proposed regulations also provide a limited “nonexempt funds” exception for employees of controlling taxable organizations that perform significant services as an employee of the ATEO. Under this exception, an employee is disregarded for determining an ATEO’s five highest-compensated employees for a year if (i) neither the ATEO, nor any related ATEO, nor any taxable related organization controlled by the ATEO pays the employee of the ATEO any remuneration for services performed for the ATEO (including granting deferred compensation, whether vested or unvested) and (ii) the employee provided services “primarily” to the related taxable organization or other non-ATEO (other than a taxable subsidiary of the ATEO) during the year. This primarily tests if the employee provided services to the related non-ATEO for over 50% of the employee’s total hours worked for the ATEO and all related organizations (including ATEOs) during the year.

Limited Services Exception: The IRS proposed regulations retain the exception from IRS Notice 2019-09 applicable when the ATEO pays less than 10 percent of employee’s total pay.

Calculation of the Excess Parachute Payment Tax

The prior IRS guidance provided that the excise tax was calculated referring to any excess parachute payment paid by the ATEO or any related organization. The proposed regulations narrow this, specifying that it is only the excess parachute payments made by the ATEO that are subject to the tax. Related non-ATEOs that pay an amount that would otherwise qualify as an excess parachute payment are not subject to this tax. The regulations also authorize the IRS to reallocate the payments if the IRS determines that the excess parachute payment was made by a related non-ATEO to avoid taxation.

The proposed regulations also provide that payments from related non-ATEO entities are included in both the base amount and the payments in the nature of compensation. This means that the pay from the ATEO, related ATEO, and related non-ATEO entities are all combined to determine if there is an excess parachute payment.

The proposed regulations make other clarifications addressing foreign organizations and governmental entities. Until final regulations are published, taxpayers may rely on either IRS Notice 2019-09 or the proposed regulations, including for periods preceding June 11, 2020.

Please contact a team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

IRS Provides Guidance On Employer Leave-Based Donation Programs That Aid Victims Of The COVID-19 Pandemic

By Bruce H. Schwartz on June 15, 2020

IRS Notice 2020-46 addresses the tax treatment of employees who elect to have their employers donate sick, vacation or personal leave as cash payments to charitable organizations that provide relief to victims of the COVID-19 pandemic.

The Notice provides that the donated leave should be not be treated as W-2 wages to the donating employees. The donated leave should not be included in Box 1 [wages subject to income tax], Box 3 [wages subject to Social Security tax] or Box 5 [wages subject to Medicare tax] of the Form W-2. But employees may not claim a charitable contribution deduction for the value of the donated leave.

The Notice also provides that an employer making the cash payments of the donated leave to a charitable organization may either claim a charitable contribution deduction for the payments or a compensation deduction.

The tax treatment provided by the Notice is essentially identical to prior IRS guidance regarding leave-based donations made regarding Hurricane Harvey and Tropical Storm Harvey, Hurricane Irma and Tropical Storm Irma, and the Ebola Virus.

Please contact a team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

PCORI Fee Reminders and Clarifications

By Brian M. Johnston on June 11, 2020

IRS Notice 2020-44 was issued this week as a reminder that Patient-Centered Outcomes Research Institute (PCORI) fees were extended under the Further Consolidated Appropriations Act of 2020 and are now not scheduled to expire until plan years ending after September 30, 2029. Annual PCORI fees will still need to be paid by insurers for employers with fully insured group health plans (and will remain to be included in annual premiums) and by plan sponsors of self-insured plans through the continued filing and payment of assessed fees on IRS Forms 720, which must be filed by July 31 each year.

The IRS Notice also clarifies there is still a filing obligation owed for all such group health plan filings for plan years ending on or after October 1, 2019, and before October 1, 2020, with the PCORI Fee amount being $2.54 (up from $2.45 for the previous PCORI fee period). However, the guidance recognizes that insurers and self-funded plan sponsors may not have been accurately tracking the number of covered lives to be reported and paid for the plan year periods from October 1, 2019, through October 1, 2020, because the previous PCORI fee assessments under the Affordable Care Act were scheduled to end after September 30, 2019. To allow for ease in current reporting of covered lives information, the Notice clarifies that in addition to the other statutory methods of reporting covered lives, for the PCORI reporting periods for plan years ending from October 1, 2019, through October 1, 2020, the IRS will allow insurers and plan sponsors to use a “reasonable” method to calculate the average number of covered lives for this period.

Impact on Employers

Employers with fully insured health plan coverage provided by an insurance carrier may see a slight increase in future insurance premiums to account for this recent update from the IRS. Self-funded health plan sponsors need to ensure they timely file their annual Form 720 by July 31, 2020, using the appropriate PCORI fee amount (i.e., $2.45 per covered life for plan years ending on or before September 30, 2019, or $2.54 per covered life for plan years ending on or after October 1, 2019), based on the calculated covered lives formula alternatives (e.g., actual count method, snapshot method, Form 5500 method, or for the October 1, 2019, through October 1, 2020, periods, a “reasonable” method for average covered lives).

Please contact a team member or the Jackson Lewis attorney with whom you regularly work to help address the impact of the PCORI fee updates on your organization, or to address other questions.

Eighth Circuit Affirms in Part, Reverses in Part University’s Early Win in ERISA Fee Suit

By Lindsey H. Chopin on June 8, 2020

As the circuit courts continue to define the pleading standards for fiduciary breach claims challenging investments in defined contribution plans, the Eighth Circuit affirmed in part and reversed in part a district court’s finding that a group of 403(b) plan participants failed to state such a claim. In Davis v Washington University, plaintiffs alleged that plan fiduciaries breached their ERISA fiduciary duties by maintaining a mixed array of retail and institutional share classes in the plan’s line up and including three specific investment options in the plan that underperformed and cost more than other allegedly comparable funds available on the market. The district court dismissed the claims entirely.

The Eighth Circuit affirmed the dismissal of plaintiffs’ fund-by-fund challenge of fees and performance finding that the complaint alleged no meaningful comparators and instead pointed to funds with different structures, strategies, and management styles. Even with proper comparators, the Court held that minimal fee differences (here, between .06% and .11%) between the funds in the plan and comparators would not be sufficient to state a claim. However, the Court reversed the dismissal of plaintiffs’ claim based on including retail share classes in the plan. Recognizing there could be lawful reasons for the fiduciaries’ conduct, the Court emphasized that inferences must be drawn in favor of the plaintiffs when reasonable, and the allegations that lower-cost share classes existed and that the plan had the buying power to invest in them stated a claim at the pleading stage.

The decision illustrates the importance of fiduciaries’ regular review of the fees charged for investment options in defined contribution plans and communication of those fees to plan participants, as the defendants, in this case, were able to secure early dismissal of many claims against them by pointing to disclosures about the investment options and the minimal fee differences between the plan’s funds and comparable funds. We are available to advise plan administrators about the implications of this case on their plans. Please contact a team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

IRS Provides Relief for Retirement Plan Elections and Consents Required to be Notarized or Witnessed

By Yana S. Johnson on June 5, 2020

The Internal Revenue Service has relaxed spousal notarization and plan representative witness requirements in 2020 for retirement plan elections in IRS Notice 2020-42. The notice addresses the physical presence requirement for notarization or witnessing of certain plan elections and provides temporary relief permitting remote notarization and witnessing subject to certain requirements.

For the period from January 1, 2020, through December 31, 2020, IRS Notice 2020-42 provides temporary relief from the physical presence requirement for any “participant election” witnessed by (i) a notary public of a state that permits remote electronic notarization, or (ii) a plan representative. A “participant election” includes any consent, election, request, agreement or communication made by or from a participant, beneficiary, alternate payee, or beneficiary.

However, this relief has particular requirements that must be met.

For an election required to be witnessed by a notary public, the physical presence requirement is deemed satisfied for an electronic system that uses remote notarization if executed via live-audio technology, provided that the system complies with state law requirements for notary publics.

For an election required to be witnessed by a retirement plan representative, the physical presence requirement is deemed satisfied for an electronic system if live audio-video technology is used that satisfies the following requirements:

The individual signing the election must present a valid photo ID to the plan representative during the live audio-video conference. The transmission of a copy of the photo ID before or after the witnessing is not sufficient.
The live audio-video conference must allow for direct interaction between the signing individual and the plan representative. A pre-recorded video of the person signing is not sufficient.
The signing individual must transmit by fax or email a legible copy of the signed document directly to the plan representative on the same date it was signed.
After receiving the signed document, the plan representative must (i) acknowledge that he or she has witnessed the signature under the requirements of this notice and (ii) transmit the signed document, including the acknowledgment, back to the individual under a system that satisfies the applicable notice requirements under Treasury Regulation § 1.401(a)-21(c) (which provides a safe harbor for electronic notices).

This relief from the personal presence requirement is temporary. It applies to elections such as COVID-19 distributions, spousal consent to distribution from a plan subject to qualified joint and survivor annuity (QJSA) requirements, retirement plan loan applications. The relief applies only to qualified retirement plan elections, and not to other types of benefits such as health and welfare plans.

We are available to help plan administrators understand and implement this relief and its’ requirements. Please contact a team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

Supreme Court: Plaintiffs Who Suffered No Injury Lack Standing to Sue under ERISA

By Howard Shapiro on June 5, 2020

The plaintiffs’ expectations surely suffered a blow after reading the Supreme Court’s initial observation in their case: “If [the plaintiffs] were to lose this lawsuit, they would still receive the exact same monthly benefits that they are already slated to receive, not a penny less. If [the plaintiffs] were to win this lawsuit, they would still receive the exact same monthly benefits that they are already slated to receive, not a penny more.” Thole v. U. S. Bank N. A., more…

Expanding the Safe Harbor for (Certain) Electronic Disclosures

By Kellie M. Thomas and Blaine A. Veldhuis on June 3, 2020

We previously wrote about the Department of Labor’s proposed expansion of its safe harbor for electronic delivery of certain retirement plan disclosures required under ERISA. The wait is finally over, with publication of the final rule (the “New Rule”) helped along by the DOL’s desire to alleviate some of the “disclosure-related problems being reported by a great many retirement plans” during the COVID-19 pandemic.

Plan administrators have long bemoaned the narrow parameters of the DOL’s current safe harbor for electronic delivery (the “2002 Safe Harbor”), which requires that plan participants have work-related computer access or provide affirmative consent to receive their ERISA disclosures electronically. This safe harbor rule became effective well before smartphones and tablets made it much easier for plan participants to access email and company intranets—and the benefit plan document that might be posted there—at any time and from anywhere.

The New Rule establishes another voluntary safe harbor for retirement plan administrators who wish to furnish “Covered Documents” to “Covered Individuals” electronically as the default means of delivery. (Though the New Rule is undoubtedly good news for retirement plan administrators, it is important to point out that the New Rule applies only to retirement plan disclosures, and welfare plan administrators may utilize the 2002 Safe Harbor only until further guidance is issued by the DOL.)

For the New Rule, a “Covered Individual” is a participant, beneficiary, or other individual entitled to Covered Documents who has provided, or has been provided with, an electronic address. This includes an email address or internet-connected mobile-computing-device (e.g. smartphone) number. “Covered Documents” include summary plan descriptions, summary of materials modifications, and pension benefit statements or information that the administrator is required to furnish to participants and beneficiaries.

Under the New Rule, electronic delivery can be the default method for distribution of Covered Documents unless a Covered Individual affirmatively opts out. The New Rule permits these two methods for electronic delivery:

Website Posting – Plan administrators may post Covered Documents on a website, if certain requirements are met.
Email Delivery – Plan administrators may send Covered Documents directly to the email addresses of Covered Individuals. The email must include specific language within the subject line of the email and a statement that briefly describes the content of the Covered Document.

The New Rule also protects Covered Individuals who may wish to opt-out of the electronic disclosures. Specifically:

Covered Individuals can request paper copies of specific Covered Documents or globally opt-out of electronic delivery entirely.
Covered Individuals must be furnished with an initial notification (on paper) of the administrator’s switch to electronic delivery.
Covered Individuals must be furnished a timely notice of internet availability each time a new Covered Document is made available for review on the internet website. The notice of internet availability may be sent via email or text message. The notice of internet availability must include, among other things, a hyperlink to the Covered Document and statement of the right to receive a paper version instead.

The New Rule is technically effective on July 27, 2020—60 days after its publication. The DOL, however, will not take enforcement action against plan administrators that rely on the New Rule before the 60-day period has expired. Administrators may also continue to use and rely on the 2002 Safe Harbor.

We are available to help plan administrators understand and implement the New Rule’s requirements. Please contact a team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

IRS Provides Further COVID-19 Relief Related to Postponed Deadlines for Time Sensitive Actions

By Rose Marie Plato on June 2, 2020

On May 28, 2020, the Internal Revenue Service (IRS) released an advanced version of Notice 2020-35, which amplifies the relief it had previously provided from deadlines for certain time-sensitive actions. The relief offered by Notice 2020-35 is provided because of the ongoing COVID-19 pandemic and is in addition to the relief provided by Notice 2020-18, Notice 2020-20, and Notice 2020-23.

Specifically, Notice 2020-35 amplifies the definition of “affected taxpayer” to include the performance of “time-sensitive actions” that are due to be performed on or after March 30, 2020, and before July 15, 2020, concerning:

Certain employment taxes;
Employee benefit plans (including section 403(b) plans, government section 457(b) plans, SEP plans, or SIMPLE IRA plans);
Exempt organizations; and
Forms 5498, 5498-SA, or 5498-ESA.

Notice 2020-35 also amplifies the definition of “time-sensitive actions” to include:

The correction of employment tax reporting errors using the interest-free adjustment process under the Internal Revenue Code of 1986 (the “Code”);
Funding waivers for defined benefit plans that are not multiemployer plans under Code Section 412(c);
Actions for multiemployer defined benefit plans;
Actions for cooperative and small employer charity pension plans (CSEC plans);
Filing Form 5330 and the payment of associated excise taxes;
The initial remedial amendment period and plan amendment rules for 403(b) pans;
The second remedial amendment period for pre-approved defined benefit plans originally scheduled to end on April 30, 2020;
The implementation of corrective actions under the IRS Employee Plans Compliance Resolution System (EPCRS) and compliance statements issued under the Voluntary Correction Program (VCP);
Requests for approval of a substitute mortality table under Code Section 430(h)(3)(C);
Electronic submissions of exempt organizations’ Form 990-N under Code Section 6033(i) and the time for commencing a suit for declaratory judgment under Code Section 7428; and
The due date for filing and furnishing the Forms 5498, 5498ESA and 5498-SA, is postponed to August 31, 2020. Penalties regarding such postponed filings will begin to accrue on September 1, 2020.

Notice 2020-35 also provides a temporary waiver of the requirement that all Certified Professional Employer Organizations (CPEOs) file certain employment tax return filings and accompanying schedules, on magnetic media (including electronic filing). This temporary waiver applies to Forms 941 (and its accompanying schedules) filed in the second, third, and fourth quarters in 2020 and Forms 943 (and its accompanying schedules) for the 2020 calendar year.

With time-sensitive actions regarding provisions of the Code for which there are parallel provisions in the Employee Retirement Income Security Act of 1974 (ERISA), the relief provided by Notice 2020-35 also applies to the parallel provisions under ERISA.

Contact any Jackson Lewis attorney with questions about how this notice may affect your company or employee benefits.

COBRA Compliance Through a COVID-19 Lens

By Suzanne G. Odom and Kathryn W. Wheeler, CEBS on June 1, 2020

Over the last few weeks, we have seen significant changes affecting COBRA compliance. Employers should contact their COBRA administrators to discuss the best practices in light of these developments, which include the Department of Labor’s publication of new model COBRA notices and COVID-19 notice and premium payment extensions. We have a helpful article that discusses agency publications. This is especially important, given the recent flurry of class action cases involving COBRA notices. A recording and a recap of the Jackson Lewis COVID-19 daily briefing episode discussing COBRA class action litigation are also available. Contact any Jackson Lewis attorney to help you navigate the new agency guidance.