iThe CARES Act includes a provision that can help participants who are affected by the coronavirus (qualified individuals*) by permitting them to take a special coronavirus-related distribution (CRD) this year. As a financial professional who assists plans or plan participants, you should be aware of the rules applicable to CRDs so that you can be in a position to help your clients. That will include, for plans, whether and how to implement CRDs, and for participants, whether to take a CRD. Note: though we discuss this in the context of 401(k) plans, the CRD provision applies to all qualified plans, 403(b) plans and IRAs.
The following chart compares the CRD to other “distributable events.” Following the chart, we address issues that you may wish to discuss with your clients.
Pre-CARES Act Distributions |
CRDs |
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Require a “distributable event” (such as death, disability, termination of employment or termination of a plan). Alternatively, 401(k), 403(b) and 457(b) plans may permit “hardship” distributions (as well as in-service distributions and plan loans) without the need for a distributable event. |
Require that the participant be a qualified individual* and that the distribution be made from January 1, 2020, up to and including December 30, 2020. |
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Hardship distributions of deferrals require a participant to meet criteria showing that they are experiencing an “immediate and heavy” financial need. However, most plans also apply the hardship standards to in-service withdrawals from other contribution sources. |
No financial hardship is required beyond a self-certification that the participant is a qualified individual.* |
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The amount of a hardship distribution may not exceed the amount necessary to satisfy the need, plus the taxes or penalties that may result from the distribution. |
A qualified individual* may take a CRD of up to $100,000 across all plans and IRAs. |
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Hardship distributions are subject to income tax in the year of distribution, plus a 10% excise tax if the participant is under age 59-1/2, and may not be repaid to the plan or rolled over to an IRA or another plan. |
A CRD may, at the election of the participant, be taxed in 2020 or ratably over three years starting with 2020. The CRD is not subject to the 10% excise tax.
Alternatively, a CRD must be repaid to the plan from which it came, to another qualified plan or to an IRA, and no interest is required or permitted to be included. Repayment may be made during a three-year period. To the extent a participant repays the CRD or rolls it into a different plan or IRA but has already paid tax, he or she may request a tax refund. A qualified individual may elect a combination of taxation and repayment. Comment: As a result of this flexibility, a CRD could be a more attractive option for participants because of the flexibility to take it into income or repay it to a plan or IRA. Participants also may take advantage of the opportunity to do Roth conversions. |
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If a participant takes a loan instead of a distribution, the participant must repay the loan, with interest, in substantially equal quarterly installments, over no more than five years (although loans for the purchase of a principal residence may be for a longer term). |
CRDs may be repaid without interest, but the repayment period is limited to three years. There are no specified installment payments requirements, so the CRD could be repaid in a lump sum at the end of the three-year period. |
If a plan is administered in a manner consistent with this special distribution rule, it will not need to be amended until the plan year beginning on or after January 1, 2022. Thus, CRDs may be made available from plans administratively, but plans will need to be amended to provide for this distribution, just not right now.
The decision on whether to adopt the CRD is a “settlor” (i.e., plan sponsor) decision; plans are not required to offer CRDs. In discussing this with employers, there are several issues to consider:
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Employers need to understand the rules applicable to these special distributions;
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They should consider economic issues, such as whether participants were furloughed and may need the money or were kept on the payroll and likely are not experiencing financial hardship.
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Does the employer feel strongly about preserving assets for retirement (for example, a plan without other in-service distribution options)?
If the plan is going to provide for CRDs, your advisors may also suggest that the fiduciaries consider how this should be communicated to the participants and whether the fiduciaries are in a position to adequately supervise the process of making the distributions and overseeing repayments, if any.
If your advisors provide assistance (either education or advice) to participants as opposed to the fiduciaries, and the plan elects to make CRDs available, there are a number of considerations:
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Is the participant a qualified individual?
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If so, does the participant need the additional money badly enough to take a significant bite out of his or her retirement savings and incur the additional income tax liability, even though it may be spread over three years?
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Are there other alternatives that might be considered?
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In all of these discussions, there has to be consideration of the impact that taking the distribution will have on the participant’s retirement savings.
These are not all of the considerations that apply to a plan sponsor’s decision to adopt and implement CRDs, nor all the considerations for plan participants. The point is that this is an important decision, one involving a concept that differs from the “normal” rules. As a valued service provider, your advisors should understand the CRD concept and be prepared to assist your clients in dealing with it.
The coronavirus pandemic has created severe hardships for millions of individuals throughout the country. The CARES Act was put in place to provide relief to those hardest hit.
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* Section 2202(a)(4)(A)(ii) of the CARES Act defines a “qualified individual,” as an individual “(I) who is diagnosed with the virus SARS– CoV–2 or with coronavirus disease 2019 (COVID– 19) by a test approved by the Centers for Disease Control and Prevention, (II) whose spouse or dependent (as defined in section 152 of the Internal Revenue Code of 1986) is diagnosed with such virus or disease by such a test, or (III) who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury (or the Secretary’s delegate).” Employees may self-certify that they meet this definition.
