As a general matter, deferral elections under non-qualified deferred compensation plans (“NQDCs”) cannot be cancelled unless a NQDC plan participant incurs an “unforeseeable emergency” or “disability” as each such term is defined in Section 409A of the Internal Revenue Code. Internal Revenue Service Notice 2020-50 (the “Notice”) adds a third reason to permit the cancellation of NQDC elections, the receipt of a coronavirus-related distribution (“CRD”) from a qualified retirement plan.
The Internal Revenue Service issued the Notice on June 19th to, among other things, help plan sponsors allow plan participants to take advantage of the provisions of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) by giving participants greater access to their retirement plan savings. In the Notice, the Service allows a participant to terminate his or her NQDC deferrals if the participant receives a CRD under the employer’s qualified retirement plan, which is a lower standard than the “unforeseeable emergency” standard set forth in Section 409A of the Code.
In a previous blog, we discussed which participants are eligible for CRDs. As modified by the Notice, CRDs are available under the CARES Act for a participant: (i) who is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention (“CDC”); (ii) whose spouse or dependent is diagnosed with COVID-19 by a CDC approved test; or (iii) who experiences adverse financial consequences as a result of: (a) being quarantined, furloughed, laid off or having work hours reduced due to COVID-19; (b) being unable to work due to lack of child care due to COVID-19 or closing or reducing hours of a business owned or operated by the participant due to COVID-19; (c) having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19; (d) the participant’s spouse or a member of the participant’s household being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; (e) closing or reducing hours of a business owned or operated by the participant’s spouse or a member of the participant’s household due to COVID-19; or (f) other factors as determined by the Secretary of the Treasury.
Plan sponsors who are interested in allowing NQDC plan participants to cancel deferral elections for more liquidity should review their NQDC plan document and assess whether a modification or amendment to the NQDC is necessary to permit the cancellation of deferrals.