Cancellation of Non-Qualified Plan Deferral Election Due to a Coronavirus-Related Distribution

In general, a participant must make a deferral election to a non-qualified deferred compensation plan before the beginning of the plan year and the election must remain in effect for the entire plan year. Participants made their deferral elections by December 31, 2019 to calendar year plans, before anyone knew how impactful the COVID-19 virus would be on businesses and individuals’ incomes.

The regulations under Section 409A of the Internal Revenue Code (the “Code”) state that a plan may provide for the cancellation of a participant’s deferral election, or such a cancellation may be made, due to an unforeseeable emergency or a hardship withdrawal, as defined in the 401(k) regulations. Both an unforeseeable emergency and a hardship withdrawal generally require the participant to have suffered a financial detriment, such as unreimbursed medical expenses, a casualty loss, or funeral expenses. As such, a decrease in income, standing alone, would not generally be sufficient to allow a participant to cancel his/her deferral election to a non-qualified plan.

IRS Notice 2020-50 (issued June 19, 2020) provides that if the participant is a qualified individual as defined in the CARES Act, and takes a coronavirus-related distribution (“CRD”) from an eligible retirement plan, that distribution will be deemed to be a hardship withdrawal for purposes of the Section 409A regulations, and the participant may be able to permissibly cancel his/her deferral election to the non-qualified plan.

The cancellation may be automatic under the terms of the non-qualified plan, or the participant may need to make an affirmative election to cancel the deferral election. Note that the deferral election must be actually cancelled, not merely postponed or delayed. Any subsequent deferral election would have to comply with the general timing rules under the non-qualified plan and Code Section 409A; therefore, if the deferral election is cancelled, the participant may need to wait until 2021 to make a new deferral election to the non-qualified plan.

The IRS interpretation in Notice 2020-50 is welcome relief by making it easier for participants who are experiencing adverse financial consequences as a result of the COVID-19 virus, such as those who are furloughed, laid off, or working on a reduced hour schedule with a related reduction in pay, to cancel their deferral elections to a non-qualified deferred compensation plan.

The Good Parts of the New Rules Regarding Distributions from IRA and Plan Interests

The SECURE ACT (Setting Every Community Up for Retirement Enhancement Act) was included as part of the massive December 2019 appropriations bill. The inclusion of the Act was a stealthy surprise, since most thought that it had been taken off the table earlier that year. For the most part, the new rules are effective for IRAs of owners who die after 2019. Although there are bad provisions, this Tax Tip discusses the four important good things about the Act. The CARES Act (Coronavirus Aid, Relief, and Economic Security Act) also affects IRA and plan distribution rules for 2020.

BAD PART MENTION: The most important bad part of the SECURE Act affects most persons who inherit IRAs. Formerly the heir was permitted to defer taxable distributions from the IRA over their lifetimes. Now, the inheritor generally must distribute the entire IRA by the end of the 5th year after the owner’s death (with no annual requirement to take any distributions before that date), unless the IRA qualifies for the 10 year rule. The Act has numerous important exceptions, and the rules are detailed. One is that if the owner dies after attaining her required beginning date (the “RBD”), then the inheritor must continue to take annual minimum required distributions (“RMDs”) using the owner’s remaining life expectancy, but applying the less generous “single life table.” The CARES Act pauses the 5 year clock to create a 6 year period if an owner died between 2015 and 2019. The 10 year payout is not extended.


The good parts of the SECURE Act and the CARES Act (the Covid-19 tax legislation:

1. The Required Beginning Date is now age 72. The Act helps by delaying the date when the IRA owner must begin withdrawing from his or her IRA (the required beginning date – the “RBD”) his or her minimum required distributions (“RMDs”). Instead of requiring distributions by April 1 of the year following the year when the owner turns 70 ½, the RBD is now April 1 following the year in which the owner is 72. BUT, if the owner was 70 ½ or older in 2019, the SECURE Act age 72 rule does not apply, but the CARES Act applies to permit the owner to waive that RMD, as well as the regular RMD otherwise due by the end of 2020. Like before, in 2021 and after, if the IRA owner delays the first year distribution until April 1 of the next calendar year, then two RMDs must be paid and taxed in that year.

1a. Skip RMD for 2020. For 2020, the CARES Act permits an owner to skip a RMD receipt.

2. IRA otherwise deductible contributions can now be made no matter what the age of the owner, but there is a catch. Formerly the owner could not make deductible contributions in the year or years in which or after he or she attained age 70 ½. Now they can be made if the owner has earned income, regardless of age, but be careful – See a. immediately below:

a. Limitation on QCD income exclusion. The Act did not change the date an IRA beneficiary can begin making a tax free Qualifying Contribution Distribution (“QCD”) from an IRA (not from a qualified plan interest) to a qualifying charity (limited $100,000 in a calendar year), which remains the date the owner attains age 70 ½. But Act Section 107(b) added language to Code Section 408(d)(8)(A), which reduces (dollar for dollar) the aggregate QCD income exclusion to the extent the taxpayer made deductible IRA contributions in years in or after he attained age 70 ½. This was done to prevent using the law change to create above the line charitable deductions.

3. In 2021 there are new and longer life tables to determine and reduce RMDs. This change is not part of the two Acts, but results from recent proposed regulations. The new tables are effective for distributions beginning in 2021. They are beneficial because they project longer life expectancies. This causes the RMDs to be lower, which permits delaying distributions and reducing current income tax. This permits more tax free buildup of value in IRAs, and is especially valuable for Roth IRAs, which are never income taxed.

Example: an owner who is 75 with a $1,000,000 IRA balance at the end of the prior calendar year would be required to distribute $40,650 under the new tables, when the owner would have had an RMD of $43,466 under the old tables. At an assumed 36% combined state and federal marginal income tax rate, the tax savings every year is about $1,000.

More good news: The new tables apply for those already receiving RMDs, whether or not otherwise recalculated annually. So in 2021, for a beneficiary already taking RMDs under a single life table (whether the based upon the life of the beneficiary or a prior holder of the IRA or plan interest) the life expectancy will reset to the new single life table. So it is possible for the life expectancy to be longer in 2021 that it was for 2020. The following is the example in the proposed regulations:

“For example, assume that an employee died at age 80 in 2018 and the employee’s designated beneficiary (who was not the employee’s spouse) was age 75 in the year of the employee’s death. For 2019, the distribution period that would have applied for the beneficiary was 12.7 years (the period applicable for a 76 year old under the Single Life Table in formerly applicable § 1.401(a)(9)–9), and for 2020, it would have been 11.7 years (the original distribution period, reduced by 1 year). For 2021, the applicable distribution period would be 12.0 years (the 14.0 year life expectancy for a 76 year old under the Single Life Table in paragraph (b) of this section, reduced by 2 years from 2019 (the year used to determine life expectancy)).”

Fewer of those inheriting IRAs will be eligible to use the tables because of the SECURE Act’s “bad” rule. That rule requires that distributions must be taken by the end of the 5th year after the owner’s death (or, at most, either (i) the end of the 10th year, or, (ii) if the owner had died after his required beginning date (now age 72), the owner’s remaining life expectancy).

4. The kiddie tax rate of the 2017 Tax Cuts and Jobs Act is repealed effective for 2019. The trust tax rates for unearned taxable income of minor children is repealed, and the parent’s tax rate apply for the year instead of trusts’ rates. The taxpayer can elect to re-determine the tax for 2018, and so amend that return.

Down With PPPs? The Continuing Saga of the Payment Protection Program

No good deed goes unpunished. Aimed at providing a financial lifeline during the “stay home” world of the COVID-19 pandemic, the federal government flung the Paycheck Protection Program (“PPP”) to the “small business” community. The PPP was one of several programs in the $2 Trillion CARES Act stimulus bill. President Donald J. Trump quickly signed the CARES Act into law. In the weeks after enactment, the PPP has been fraught with large statutory gaps and confusing, and often conflicting, guidance.

Many small businesses are nearing the end of the all-important 8-week “covered period” (which generally begins when the business receives the PPP loan – but see discussion below). The covered period is the testing period for determining, for loan forgiveness, whether a recipient has expended an appropriate quantum of loan proceeds and spent those proceeds on eligible purposes. Many practical questions had been unanswered with respect to what payments to employees were eligible for loan forgiveness and how to calculate the forgiveness amount. Importantly, the CARES Act provides that the amount of the PPP loan that is forgiven will not cause the borrower to have to include the amount of forgiveness in its income (i.e., the amount of forgiveness will not be taxed).

Over the Memorial Day holiday, the U.S. Department of the Treasury and the Small Business Administration issued new interim final rules which offer helpful guidance. Copies of all of the interim final rules related to the PPP are available here. Some helpful tidbits from the new guidance include:

  • “Payroll costs” paid or incurred during the covered period (or “alternative payroll covered period” discussed below) are eligible for forgiveness.
  • The introduction of an “alternative payroll covered period,” which allows borrowers, if elected, to measure the 8-week covered period beginning with the first day of the first payroll cycle in the covered period (for amounts paid or incurred on payroll costs, but not amounts paid or incurred on other eligible purposes which still must be expended during the covered period).
  • Treating payroll costs as “paid” either on the day checks are distributed or ACH transfers are initiated.
  • Allowing payroll costs incurred, but paid on the first regular payroll date after the covered period (or alternative payroll covered period), to be counted towards forgiveness.
  • Clarifying that “hazard pay” or bonuses paid to employees during the covered period (or alternative payroll covered period) are eligible “payroll costs.”
  • Specifying that advance payments of interest on otherwise eligible mortgage obligations are ineligible for loan forgiveness.
  • Adding helpful guidance on calculating the reduction in the forgivable amount for rehiring employees.

In addition to the recent helpful guidance, word has circulated that the Enforcement Division of the U.S. Securities and Exchange Commission has begun to ask copies of PPP loan applications from public companies that have secured PPP loans. The eligibility of public companies to receive a PPP loan has been the subject of intense scrutiny, particularly focused on the “necessity” certifications. Many public companies opted to return PPP loans once the Department of the Treasury released a safe harbor allowing for repayment without consequence.

Finally, the House of Representatives passed on a 417-1 vote legislation to expand and refine the PPP. The legislation would offer a number of helpful refinements. For example, the House legislation would: lower the amount of PPP loan proceeds that must be used on “payroll costs” to 60 percent; extend the 8-week covered period 24 weeks; extend the repayment period to 5 years; and provide that repayment obligations would not begin until after the SBA determines that all or a portion of a PPP loan is not forgiven. The Senate is expected to act on the House legislation this week.

For more information, please contact Peter Kulick at 517-487-4729, Troy Terakedis at 614-744-2589, or any other attorney in our tax group.


Paycheck Protection Program Flexibility Act Modifies Paycheck Protection Program

On May 28, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the “Act”) was passed by the U.S. House of Representatives. On June 3, 2020, the Act was passed by unanimous consent by the Senate. The Act now awaits signature by the President. The Act makes significant changes to the Paycheck Protection Program (“PPP”), as enacted as part of the CARES Act, including provisions related to loan forgiveness. The more significant changes introduced by the Act include:

  • The “covered period” for making permissible expenditures (payroll costs, rent, utilities, and mortgage interest) in connection with loan forgiveness has been changed from the original 8 week period following loan origination to a 24 week period following loan origination (or December 31, 2020, if earlier). A borrower can elect to have the original 8-week period continue to apply.
  • The amount that must be expended on payroll costs for loan forgiveness has been reduced from 75% (as provided in SBA guidance) to 60%. However, as drafted, the Act provides that a borrower must spend at least 60% of the loan proceeds on payroll costs (during the covered period). The language of the Act suggests that if a borrower does not meet the 60% threshold, then none of the loan will be forgiven. Under existing SBA guidance, the amount of loan forgiveness is reduced — but not eliminated entirely — if less than 75% of the loan proceeds are used for payroll costs. That is, under existing guidance, loan forgiveness is not completely eliminated if the 75% threshold is not met. Senators had raised concerns about this issue; however, the Senate acquiesced to pass the House version to avoid sending the legislation to a conference committee. At this time, it is unknown if the SBA will issue guidance providing for a reduction in loan forgiveness, rather than eliminating loan forgiveness altogether if the 60% threshold is not met. Senator Marco Rubio has previously requested guidance whether the Department of the Treasury can adopt the more flexible forgiveness standard through administrative regulations.
  • A borrower now has until December 31, 2020 (instead of June 30, 2020) to restore their workforce levels and wages to pre-pandemic levels in order to avoid a reduction in the loan forgiveness amount due to a decrease in such levels during the covered period.
  • The Act provides that the amount of loan forgiveness will be determined without regard to a proportional reduction in the number of full-time equivalent employees if the borrower, in good faith, is able to document (i) an inability to rehire individuals who were employees of the borrower on February 15, 2020 and an inability to hire similarly qualified employees for unfilled positions before December 31, 2020, or (ii) an inability to return to the same level of business activity as the borrower was operating at before February 15, 2020 , due to compliance with requirements or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to COVID-19.
  • Loans made after the effective date of the Act will have a minimum maturity of 5 years (previously, loans had a 2 year maturity). The interest rate on PPP loans remains unchanged at 1%.
  • Under the Act, a borrower that has a PPP loan forgiven will be eligible for the deferral of payroll taxes as provided in the CARES Act. Previously, such deferral was prohibited if a borrower was afforded loan forgiveness.

As of June 4, 2020, approximately $130 billion in PPP funding allocation remained available. Thus, small business that have not previously received a PPP loan can still apply.

For more information, please contact Troy Terakedis at 614-619-2203 or Peter Kulick at 517-487-4729.


Spousal Tax Relief

Taxpayers should be aware that by signing a joint tax return with your spouse, you are jointly and severally (individually) responsible for any tax, interest, and penalties that arise from that return.

The IRS can pursue collection from either you or your spouse (or former spouse). However, you may be absolved of part or all of the liability if you qualify for one of three relief programs offered by the IRS: 1) Innocent Spouse Relief — if your spouse did something wrong giving rise to the tax liability due; 2) Separation of Liability — if the liability can be allocated between you and your spouse (or former spouse); or 3) Equitable Relief — if you do not qualify for innocent spouse relief or separation of liability, but exceptional circumstances justify relief from liability at issue.

These three relief programs may prove to be beneficial to a taxpayer that has signed a joint tax return with a spouse in situations where the IRS is pursuing action against the taxpayer based on joint and several liability.

For more information, please contact James Mauro at 517-487-4701 or any other attorney in our tax group.