CARES Act Aids Pandemic Recovery through Coronavirus-Related Distributions
By Mike Rahn, CISP
EDITOR’S NOTE: This article has been updated to reflect guidance from the IRS about coronavirus-related distributions that was released soon after this article originally posted.
The challenges currently facing the nation during the coronavirus (COVID-19) pandemic have not been experienced in the U.S. in more than a century, the last comparable event being the Spanish influenza pandemic following World War I. But the legislative and regulatory response to the COVID-19 pandemic is not new as it pertains to retirement plans. Its blueprint is largely the same as one that has been used at intervals since 2005, with Congress and regulatory agencies providing very similar relief to victims of certain hurricanes, tropical storms, and wildfires.
In those special natural disaster circumstances, savers with IRA or retirement plan assets have been given special access to these funds as potential resources needed to help them recover from the effects of the disasters. In the case of the COVID-19 pandemic, however, the traumatic events are not natural disasters but adverse economic effects due to illness, or interrupted employment. While it’s generally inadvisable to deplete retirement assets for non-retirement purposes, events like the COVID-19 pandemic are among the exceptions.
On March, 27, 2020, Congress passed, and President Trump signed into law, the largest relief package in U.S. history. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was crafted to assist the millions of Americans affected by the pandemic, with provisions that can benefit those with assets in retirement or health savings arrangements. The legislation not only grants tax-favored access to savings, but provides a pathway to replenishing them later.
Coronavirus-Related Distributions
If an individual satisfies the conditions for a coronavirus-related distribution (CRD), he may withdraw up to $100,000 in aggregate from eligible retirement plans, including IRAs and employer-sponsored retirement plans, without (if under exemption age) owing the 10 percent early distribution penalty tax.
A CRD is defined as a distribution made on or after January 1, 2020, and before December 31, 2020, to a qualified individual.
Qualified Individual
Subsequent to enactment of the CARES Act, IRS Notice 2020-50 broadened the definition of who is eligible for a CRD—and, therefore, who is eligible for CARES Act tax benefits.
Initial guidance defined a “qualified individual” as
an individual (or the spouse or dependent of the individual) who is diagnosed with the COVID-19 disease or the SARS-CoV-2 virus in an approved test; or
an individual 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 reduced hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Treasury Secretary.
Notice 2020-50 added new circumstances to the definition of “qualified individual”:
An individual who has experienced a reduction in pay (or self-employment income) due to COVID-19, or has had a job offer rescinded or a start date for a job delayed due to COVID-19.
An individual whose spouse or a member of the person’s household has
been quarantined, furloughed or laid off, or had work hours reduced due to COVID-19;
been unable to work because of a lack of childcare due to COVID-19,
had a reduction in pay (or self-employment income) due to COVID-19; or
had a job offer rescinded or a start date for a job delayed due to COVID-19.
An individual whose spouse or a member of the person’s household has experienced the closing or a reduction of hours of their business due to COVID-19.
For purposes of applying these additional factors, a member of the individual’s household is someone who shares the individual’s principal residence.
Eligible Retirement Plan
An eligible retirement plan is a qualified retirement plan (such as a 401(k) plan), 403(b) plan, governmental 457(b) plan, or an IRA. The following are CRD conditions.
CRDs will be taxed ratably over a three-year period, unless an individual elects to be taxed more rapidly.
Individuals may repay CRDs within three years; repayments may be made to an eligible retirement plan or an IRA.
CRD repayments made within the three-year period will be treated as having satisfied rollover requirements.
CRDs will meet the retirement plan distribution requirements, as long as all distributions from one employer do not exceed $100,000.
Although CRDs may be rolled over, they are not considered “eligible rollover distributions” for certain purposes. Therefore employers are not required to offer a direct rollover option, to withhold 20 percent on a CRD, or to provide a notice that explains tax and rollover options (the 402(f) notice).
Status Determined by Taxpayer
Whether distributions from retirement plans or IRAs qualify for the special tax treatment and repayment options of a CRD is determined by taxpayer facts and circumstances. These are the factors of COVID-19-related illness or economic harm, and the timing of distributions. Tax benefits will be realized in the process of income tax return filing and the decisions made by the taxpayer at that time.
Retirement plans can, however, restrict access, allowing distributions only to participants who are already eligible to receive them, such as those who have reached age 59½. Alternatively, a plan can amend to allow distributions to all participants—of any age—if they are CRD-eligible. Importantly, an employer can rely on a participant’s self-certification that he is CRD-eligible.
Still Less Than Clear
Despite the CARES Act statutory language and multiple items of post-legislation guidance intended to provide clarity, there are still issues that seem less than entirely clear. Among them are the following.
Does a COVID-19-related economic impact on a spouse qualify his partner to take a CRD?
Must a person be COVID-19-affected before taking a distribution that he wishes to be considered CRD-eligible?
If a retirement plan distribution consists of after-tax or designated Roth account (Roth 401(k) or Roth 403(b)) assets, how would their rollover back into an eligible plan be accurately tracked?
How will repayments made to IRAs be reported? Will it be by the special repayment boxes (#14 series) on Form 5498, IRA Contribution Information? This appears likely based on reporting recontributions following prior disaster events.
The almost unprecedented health and economic challenges caused by the COVID-19 pandemic have demanded a response of similar magnitude. One key element of that response has been the CARES Act and the CRDs that are a central element of it.
