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A Closer Look: Coronavirus-Related Distributions A Closer Look: Coronavirus-Related Distributions

A Closer Look: Coronavirus-Related Distributions

Return to Summary Table of COVID-19 Legislation for Employer-Based Retirement and Welfare Plans

Section 2202(a) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted on March 27, 2020, adds a new category of distribution, referred to as a "coronavirus-related distribution" or "CRD", made from an eligible retirement plan or IRA to a qualified individual on or after January 1, 2020, and before December 31, 2020, up to an aggregate limit of $100,000. The IRS issued frequently asked questions (FAQs) addressing CRDs on May 4, 2020, which stated that the Treasury Department and IRS anticipate releasing guidance on these provisions in the near future. In the interim, the FAQs advise employers to refer to IRS guidance issued in Notice 2005-92 which addressed similar distribution provisions under the Katrina Emergency Tax Relief Act of 2005 (KETRA), for guidance on the CRD provisions.

Types of Plans

CRDs are permitted from the following types of plans:
  • 401(a) plans (including 401(k) plans);
  • 403(b) plans;
  • Governmental 457(b) plans; and
  • IRAs
Distributions from a 401(k) plan, 403(b) plan, and governmental 457(b) plan generally cannot be made in-service until age 59 ½. The CARES Act creates a new in-service distribution right for these plans. For example, a participant in a 401(k) plan who is age 40 can request a CRD in-service if the participant is a qualified individual, even though the distribution would not otherwise be permitted under applicable law.

While CRDs can be made from defined benefit plans and money purchase pension plans (MPPs), the IRS stated in FAQs issued on May 4, 2020 that the CARES Act does not create a new in-service distribution right for these types of plans. Accordingly, CRDs from a defined benefit plan or MPP cannot be made in-service prior to age 59 ½. This restriction would apply to any MPP assets held in profit sharing plan, so it is important to identify whether a 401(a) plan holds MPP assets before implementing CRDs.
CRDs are not permitted from 457(b) plans sponsored by tax-exempt employers.

Qualified Individuals

A "qualified individual" is an individual who:
  1. is diagnosed with the virus SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention; or
  2. has a spouse or dependent diagnosed with the virus SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention; or
  3. experiences adverse financial consequences as a result of being quarantined, furloughed or laid off or having work hours reduced due to the virus SARS-CoV-2 or COVID-19; or
  4. experiences adverse financial consequences as a result of being unable to work due to lack of child care due to the virus SARS-CoV-2 or COVID-19; or
  5. experiences adverse financial consequences as a result of closing or reducing hours of a business owned or operated by the individual due to the virus SARS-CoV-2 or COVID-19.
The IRS is also authorized to issue guidance that expands the list of factors taken into account in determining whether an individual is a qualified individual. The IRS indicated in FAQs issued on May 4, 2020, that it is currently reviewing comments from the public requesting that this list of factors be expanded.

Categories 3, 4 and 5 above relate to the financial impact to the employee directly and do not include the financial impact related to a spouse's or dependent's employment. For example, an employee is not a "qualified individual" by reason of his or her spouse being furloughed by the spouse's employer. Category 5 also does not include the circumstance where an employer has reduced employee pay but not reduced employee work hours. For employers that have not furloughed or laid off employees, or reduced work hours for employees, their employees will likely only be qualified individuals to the extent that either they or their spouse or dependent has been diagnosed with the virus SARS-CoV-2 or with COVID-19. This is an important consideration when determining whether to add this type of distribution to an employer's retirement plan.

The plan administrator can rely on employee self-certification that he or she is a qualified individual, unless the administrator has actual knowledge to the contrary. However, IRS FAQs issued on May 4, 2020, reiterate that the individual can only treat the distribution as a CRD on his or her tax return if the individual actually meets the eligibility requirements.

Employer Considerations

Many retirement plan vendors took immediate action following enactment of the CARES Act legislation to prepare their systems for administration of CRDs across all eligible retirement plans. Some vendors implemented an "opt-out" approach for the plans they administer, while others implemented a more conservative "opt-in" approach. Accordingly, it is possible that CRDs were permitted in operation from a retirement plan before a plan sponsor had time to consider whether to adopt this optional provision. The vendors' expedited implementation was in response to the anticipated demand by participants for access to retirement funds. However, while employers are not required to actually amend their retirement plans until the end of the plan year beginning on or after January 1, 2022 (January 1, 2024 for governmental plans) to provide for CRDs, it is still important that an employer go through the plan's normal plan amendment processes in determining whether or not to permit CRDs under the plan. An employer that initially chooses to "opt-out" of CRDs can reevaluate and opt-in at any time during 2020.

Many retirement plan vendors have established administrative processes to expedite CRD requests through their call centers and/or online, and have waived the normal fees for processing distributions. Since they can rely on participant self-certification that a participant is a qualified individual, vendors can process a CRD without any required paperwork (except in the case of ERISA plans that require spousal consent for distributions, in which case additional paperwork will be needed). Accordingly, in many cases there will be very little effective oversight as to whether the employee truly meets the criteria of a qualified individual, making this an in-service distribution option that could be exercised by potentially any employee. 

In determining whether to permit CRDs, plan sponsors should consider the needs and concerns of their specific employee population. In addition, employers should evaluate the risk of retirement leakage and the potentially severe impact on "retirement readiness" if CRDs are heavily utilized by their employees. CRDs are being made easily accessible by vendors, the definition of qualified individual is fairly broad, and the amount of the distribution does not have to correspond to the actual economic loss suffered by a qualified individual. Although employees have the option to repay CRDs over a three-year period, few employees may be in a financial position to do so. Even so, taking a distribution when account balances have taken significant market losses means that repayment later (when the market is presumably higher) will never fully make the employee whole. Plan sponsors may wish to consider including education on these issues with employee communications. 

Employer Compliance

The $100,000 limit on CRDs is an individual limit across all retirement plans and IRAs. An employer is responsible for ensuring compliance with the $100,000 limit only with respect to the retirement plans it and any employer in its controlled group maintains. An employer with multiple vendors and/or multiple plans should discuss with its vendors how this limit will be monitored in the aggregate. Employers that sponsor a retirement plan or plans and also participate in a state retirement plan should discuss with the state plan how this limit will be monitored in aggregate. Many vendors are requiring participant certifications that this limit has not been (and will not be) exceeded as part of the distribution request, which should help to demonstrate good faith in attempting to comply with this rule.

Taxation of CRDs

CRDs are exempt from the 10% early distribution tax under IRC § 72.

If a retirement plan permits CRDs, the distribution is not treated as an eligible rollover distribution, mandatory withholding does not apply, and a 402(f) special tax notice is not required. Accordingly, 10% withholding will apply, unless the participant elects out of withholding. The CRD will be reported on a Form 1099-R, even if the CRD is repaid in 2020. IRS guidance issued under KETRA provides that the Form 1099-R can reflect either distribution code 2 (early distribution, exception applies) or distribution code 1 (early distribution, no known exception) in box 7.

If a retirement plan does not permit CRDs, a qualified individual may treat a distribution as a CRD on his or her federal tax return if the distribution otherwise satisfies the requirements for a CRD. For example, a terminated employee who could elect a distribution at any time may request a distribution that qualifies as a CRD. The same is true for an employee who is permitted to take in-service distributions upon reaching age 59 ½. In these situations, although the individual may take advantage of favorable tax treatment for the distribution, the plan would report the distribution based on the type of withdrawal permitted. In most cases, this would mean the distribution would be reported as an eligible rollover distribution that is subject to 20% mandatory withholding. In addition, if the participant receives the distribution before age 59 ½, it would be reported on Form 1099-R as a distribution that is subject to the early distribution penalty. If the distribution qualifies as a CRD, the individual would be able to receive a waiver of this penalty when completing his or her income tax return.

Unless a participant elects otherwise, a CRD will be included in his or her gross income ratably over three tax years beginning with the year of distribution. Note that the retirement plan or IRA will report the entire distribution as taxable (subject to any investment in the contract) in the year of distribution. The participant is responsible for reporting the distribution in gross income on his or her income tax return using Form 8915-E.


A participant who receives a CRD may repay all or part of the distribution in one or more contributions to any eligible retirement plan to which a rollover contribution can be made within three years of the distribution. The repayment will be treated for tax purposes as a direct rollover (or, if made to an IRA, as a trustee-to-trustee transfer) made within 60 days of distribution, such that the participant is not subject to federal income tax on the CRD. A participant who repays a CRD may need to file an amended tax return to claim a refund of any taxes attributable to the amount of the CRD included in income for that year.

The IRS stated in FAQs issued on May 4, 2020, that "it is anticipated that eligible retirement plans will accept repayments" of CRDs, but noted that plans that do not accept rollover contributions are not required to be amended to accept repayments. The FAQs do not provide a definitive answer as to whether an eligible retirement plan that permits rollovers could refuse to accept CRD repayments. We expect this question to be answered in guidance that the IRS has stated will be issued in the near future.

IRS Notice 2005-92 issued under KETRA states that a plan administrator accepting a repayment of a CRD must reasonably conclude that the repayment is eligible for rollover treatment, made within the three year repayment period, and is not in excess of the amount of the distribution. The plan administrator may rely on the reasonable representations of the individual in accepting a repayment. Qualified individuals will use Form 8915-E to report repayments made during a taxable year.

For more information about the employee benefit implications of the COVID-19 pandemic and how they might affect your employee benefit plans, please contact any one of Ice Miller's Employee Benefits attorneys. Please contact our COVID-19 Task Force if you have any questions about managing the risks of the coronavirus pandemic. Also see our Coronavirus (COVID-19) Resource Center for additional resources, which is updated daily.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
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