CARES Act and retirement programs

As a means of helping to ease the financial burden on individuals during the economic distress caused by the coronavirus, the recently enacted Coronavirus Aid, Relief and Economic Security Act (CARES Act), has made revisions to the rules and the operations of various retirement programs. Simplistically, these revisions have made it possible for certain individuals affected by the adverse economic conditions to access funds in their retirement programs through loans or distributions. Furthermore, the CARES Act has implemented changes in the taxation of such distributions and eliminated the need for required minimum distributions (RMDs) for a limited period of time.

This article will discuss the new distribution and loan rules. The elimination of the RMDs has been discussed in a previous article.

Qualified individuals

In order to take advantage of the revised loan arrangements or distribution options, the individual must meet the definition of a “qualified individual.” Under the CARES Act, a qualified individual is a person who:

  • Has been 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.
  • Has a spouse or dependent (as determined under Internal Revenue Code Section 152) who has been 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.
  • Is experiencing adverse financial consequences as a result of being quarantined, being furloughed or laid off, having work hours reduced, or being unable to work due to a lack of childcare, due to the SARS-CoV-2 virus or COVID-19.
  • Qualifies under other factors as determined by the Secretary of the Treasury.

Coronavirus related distributions

Under the provisions of the CARES Act, a person who has satisfied the requirements to be a qualified individual may receive a distribution from an eligible retirement plan (coronavirus distribution). These plans would include defined contribution plans such as profit sharing plans, 401(k) plans, 403(b) plans, and governmental 457(f) plans. Individual Retirement Accounts or Individual Retirement Annuities (collectively IRAs) are also included.

The person would need to certify to the plan administrator of the retirement program that he or she is a qualified person, as described above. The plan administrator may rely on such certification (unless the plan administrator has knowledge that the certification is false) and will not be required to make an independent investigation.

The maximum amount that a qualified individual may receive is $100,000. This limit applies to all programs sponsored by members of a controlled group of related entities as defined in the Internal Revenue Code.

The CARES Act also indicates that if a retirement program is prohibited by the Internal Revenue Code from permitting in-service distributions before age 59½, or unless a participant has incurred a hardship, the retirement program will not be seen as violating those rules. What that means is a 401(k) plan, for example, can permit a coronavirus distribution to a participant even though the participant is still employed, has not attained age 59½ or incurred a hardship event that satisfies the hardship distribution rules.

Taxation of coronavirus distributions

The CARES Act provides that coronavirus distributions may not be rolled over to an IRA or to another retirement program that can normally accept rollovers. The coronavirus distribution is therefore taxable to the qualified individual. Because the coronavirus distribution may not be rolled over, it is therefore not subject to the mandatory 20% federal withholding requirement.

The coronavirus distribution is to be included in the qualified individual’s income for federal income tax purposes ratably over three years unless the qualified individual elects to include it all in the year of distribution. At this time, it is unclear whether states will permit the three-year period for state income tax purposes.

Repayment of coronavirus distributions

A qualified individual who receives a coronavirus distribution will be permitted under the CARES Act rules to repay all or part of the coronavirus distribution during a three-year period beginning on the day after the qualified individual receives the distribution. The repayment may be in one or more payments. The repayments are treated as if they were trustee-to-trustee transfers.

The repayment may be made to any eligible retirement plan. What that would mean is that a qualified individual could receive a coronavirus distribution from his or her 401(k) plan and repay the distribution to his or her IRA.

Because the repayment will be with after-tax money, it would appear that the eligible retirement plan receiving the repayment will need to track the repayment as some form of after-tax contribution. The repayment would effectively create a basis in the eligible retirement plan attributable to that repayment.

In addition, if the qualified individual is including the coronavirus distribution ratably in his or her income over three years, and he or she repays the entire coronavirus distribution in year two, it is not clear if the qualified individual can then not include the last two years into his or her income, and if so, if two-thirds of the repayment is effectively pre-tax.

Expanded plan loans

In addition to permitting access to retirement program assets through distributions, the CARES Act permits an expansion of the rule relating to plan loans. These rules only apply to retirement programs that are permitted to have loans. This means IRAs may not use these rules.

The normal rule with respect to plan loans is that a participant may borrow the lesser of $50,000 or 50% of his or her vest account balance. The term of the loan may not be longer than 5 years unless the purpose of the loan is to finance the purchase of the participant’s primary residence. Further, the loan must be payable in substantially equal payments of principal and interest at least quarterly.

Under the CARES Act, a qualified individual may borrow up to the lesser of $100,000 or 100% of his or her vested account balance. This increased amount is available to qualified individuals who apply for a loan within 180 days of the enactment of the CARES Act.

Further, a qualified individual who has an existing loan on or after March 25, 2020, may delay any repayments due in 2020 on such loan or loans for one year. The loan continues to accrue interest and the repayment schedule is to be re-amortized. Effectively, this can add a year to the term of the loan. Such an extension does not cause the plan loan to violate the 5-year maximum term requirement.

Plan amendments

Generally, these features permitting distributions and expanded loans are not required. The only required feature is the extension of 2020 loan repayments for qualified individuals on plan loans. The other changes are up to discretion of the sponsor of the retirement program.

If a retirement program wishes to permit distributions that satisfy the rules to be coronavirus distributions, the program must either fit them under an existing distribution option such as a hardship distribution or add a new distribution option for such coronavirus distributions.

It is not clear whether retirement programs will be required to accept the repayment of any coronavirus distributions or if they can be designed so that they only accept repayment of their own coronavirus distributions.

Likewise, with the increased plan loans, a plan is not required to permit loans. The CARES Act does not require that plans offer loans; however, if plans do offer loans, sponsors can choose to offer the increased limits or leave the existing limits in place. As mentioned above, the deferral of payments due on existing loans can be delayed for a year. The plan will need to permit that.

A retirement program that wants to permit either the distributions or the increased loans or both will need to make an amendment to the program. The CARES Act provides that the program may operate in accordance with the new rules without a contemporary amendment. The program will need to be amended to reflect how the program operated by the last day of the first plan year beginning on or after January 1, 2022. For calendar year plans, that will mean the date to adopt appropriate amendments will be by December 31, 2022.


The coronavirus and its attendant economic disruptions have created challenges for retirement program participants and for the sponsors of such programs. The CARES Act does provide some mechanism for individuals who satisfy the requirements to be a qualified individual to access retirement program assets in a time of need. Sponsors of such retirement programs need to make decisions whether to offer such access and work with their third party administrators on how best to operate these new access options.

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