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Answers to Your Questions on the CARES Act & Retirement Plans

By Fred Reish

The most commonly asked questions and answers on the CARES Act and retirement plans

Fred Reish is an ERISA attorney whose practice focuses on fiduciary responsibility, retirement income, and plan operational issues. He has been recognized as one of the “legends” of the retirement industry by both PLANADVISER magazine and PLANSPONSOR magazine.

QUESTION 1:  If a plan sponsor does not adopt provisions to allow for COVID-19 withdrawals, but a terminated participant who is under the age of 59½ takes a withdrawal and uses the distribution for COVID-19-related expenses, does the 10% early withdrawal penalty apply?

ANSWER:  Unfortunately, the CARES Act doesn’t directly address that issue. The requirements for a “coronavirus-related distribution” (or CRD) are only that (1) the distribution not exceed $100,000, (2) the distribution be made between January 1, 2020 and December 31, 2020 and (3) the participant be a “qualified individual.” A qualified individual is (1) one who is diagnosed with COVID-19, or (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of the pandemic. (That is a brief summary of the definition. There are detailed conditions and examples in the statute.)

A literal reading of the Act, though, seems to say that a participant can classify any distribution as a CRD if the participant is a qualified individual. Specifically, the CARES Act CRD provision says. “Section 72(t) of the Internal Revenue Code of 1986 shall not apply to any coronavirus-related distribution.” 72(t) is the section that imposes the 10% tax on early distributions (e.g., before 59½). The Act then defines a CRD as “any distribution from an eligible retirement plan made (i) on or after January 1, 2020 and before December 31, 2020, (ii) to an [qualified] individual . . .”. The provision says “any distribution” and only requires that the individual is “qualified.” It does not require any determination by the plan administrator. Also, the provision includes distributions in the period from January 1, 2020 to March 26, 2020, which predate the enactment of the CARES Act. The only reasonable interpretation of those dates including covered distributions is that the new rule covers any distributions since participants couldn’t have specifically requested CRDs in that period (because the CARES Act was not enacted until March 27, 2020).

That is a reasonable interpretation of the Act. However, if a person wants to avoid any doubt, and the rollover period is still open, a conservative approach could be to roll the distribution into an IRA and then take a CRD from the IRA.

Note that the Treasury Department has given special relief for rollovers where the end of the 60-day period would end between April 1 and May 15, 2020. In that case, the rollovers can be completed up until July 15, 2020. Unfortunately, though, that would not provide relief for distributions made in January. However, it’s possible that the Treasury Department will provide additional relief for those taxpayers.


Plan amendments are not required until the plan year beginning in 2022.


QUESTION 2:  Many recordkeepers are amending their plan documents for the CARES Act and implementing the hardship and loan provisions on a negative election basis. Should plan committees meet to discuss these plan changes and either approve or disapprove these plan changes, as evidence of a prudent process?

ANSWER:  From a technical legal perspective, the enhanced loan and coronavirus-related distribution (CRD) provisions are plan design issues. That means that they are plan sponsor (that is, not fiduciary) decisions. Only plan sponsors can decide what their plans will say. However, the recordkeepers are trying to help plan sponsors quickly make decisions and to then implement the provisions. That is being done through a default, or deemed consent, procedure. 

While the adoption of these provisions is an employer (or so-called “settlor”) decision, the implementation of the CRD and enhanced loan provisions is a fiduciary matter. So, yes, plan committees should understand these changes and coordinate with their recordkeepers to implement them and to communicate with the participants. Advisors can play an important role in this process.

By the way, the amendments are not required until the plan year beginning in 2022. So, for the time being, the changes can be adopted and implemented on an administrative basis.


QUESTION 3:  Is someone a “qualified individual” under the CARES Act if they experience financial consequences as a result of just themselves being quarantined, furloughed, having work hours reduced, etc. or would it include if their spouse or other dependent did? 

ANSWER:  On the face of the rule, it would only be if the participant is affected in that way. The first two definitions of a “qualified individual” are if the participant (or IRA owner) is diagnosed with the virus or the disease (COVID-19), or if a spouse or dependent are diagnosed. The third definition-the one the question refers to-covers individuals who experience “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 such other factors as determined by the Secretary of the Treasury . . .”.

All of the specified factors in the third category apply to the individual. However, it’s possible that, as we have more experience with the pandemic, the Secretary of the Treasury will issue guidance expanding that third category to include similar factors affecting spouses or dependents.


QUESTION 4:  If a participant is terminated in 2020 will their outstanding loan be due immediately? 

ANSWER:  Perhaps. The enhanced loan provisions (100% of vested account up to $100,000) are only available to “qualified individuals” who are affected by the coronavirus (see the definition above). In addition, the due date for payments on the loan are delayed for one year. As a result no payments will be due in 2020.

Beyond that, though, the CARES Act does not change any of the provisions related to participant loans. For example, if a plan requires payroll withholding for repayment, and if a participant terminates employment, the loan could be deemed due for that reason (that is, the loan could no longer be repaid by payroll withholding). From a practical perspective, plan sponsors should consider, in these extraordinary times, revising their loan policies to allow repayment by means other than payroll withholding.

As a practical matter, if the plan sponsor believes that participants will be laid off or will terminate employment in this coronavirus period, it might be better for the plan sponsor to instead adopt the “coronavirus-related distribution” (CRD) provision. Under the CRD rules, the affected participants (that is, the “qualified individuals”) will have the option to pay taxes or to rollover part or all of the distribution, and thereby avoid taxes. The period for rolling over or repaying the CRD is three years, which is shorter than the typical loan repayment period, but the greater flexibility of the CRD will likely outweigh that difference.


RMD rules are temporarily waived for the 2020 calendar year. 


QUESTION 5:  Can a distribution that was taken in January 2020 and initially characterized as a RMD be rolled over to an IRA, and then can a partial or full ROTH conversion be done in 2020 with those dollars?

ANSWER:  If an RMD was or is taken in 2020, it will not be treated as an RMD. Instead, it can be rolled over, including a rollover to an IRA. That is because the RMD rules are temporarily waived for the 2020 calendar year. As a result, any such distribution would not be considered to be “required.” Because of that, distributions that would have been treated as RMDs in the past, and therefore could not have been rolled over, will be treated differently this year. That is, they will be eligible to be rolled over. 

The CARES Act did not address Roth conversions, positively or negatively. Consequently, the rules for conversations of IRA amounts to Roth status have not been changed. In other words, the rules governing Roth conversions remain the same as prior to the CARES Act. 


QUESTION 6:  If you repay a coronavirus-related distribution (a CRD) within the three years, can you recoup any taxes paid? Does it become a penalty AND tax-free temporary withdrawal?

ANSWER:  Yes. During the three-year period following the distribution, the affected participant (who must be a “qualified individual” defined above) can repay part or all of the distribution and wash out the taxation of the distribution (to the extent of the repayment). Thus, for example, if a participant repays the full amount of the CRD within the three years, the taxation of the distribution will be fully offset. Furthermore, the repayments are not required (or even permitted) to include a factor for interest. Only the principal of the distribution can be repaid.

Note that the IRS will need to issue guidance on exactly how this is to be done. For example, what will the effect of different marginal rates in the three-year period be?  And, will the tax savings on the repayment be exactly as the taxes paid if the participant is in different tax brackets in different years. 


QUESTION 7:  Can you take a CRD from a 401(k) and pay it back to an IRA, without it being a taxable event? 

ANSWER:  Yes. The applicable section of the CARES Act says:

Any individual who receives a coronavirus-related distribution may, at any time during the 3-year period beginning on the day after the date on which such distribution was received, make 1 or more contributions in an aggregate amount not to exceed the amount of such distribution to an eligible retirement plan of which such individual is a beneficiary . . .

The Act then goes on to define “eligible retirement plan” as:The term ‘‘eligible retirement plan’’ has the meaning given such term by section 402(c)(8)(B) of the Internal Revenue Code of 1986.

And, in turn, 402(c)(8)(B) includes both qualified plans and IRAs. And finally, the CARES Act says that those repayments will be treated as rollovers and the participant will not be taxed on them:  

. . . if a contribution is made . . . with respect to a coronavirus-related distribution from an individual retirement plan . . , then, to the extent of the amount of the contribution, the coronavirus-related distribution shall be treated as a distribution described in section 408(d)(3) of such Code [that is, eligible for rollover] and as having been transferred to the eligible retirement plan in a direct trustee to trustee transfer within 60 days of the distribution.


QUESTION 8:  How long does a lay-off of more than 20% of employees have to last before it becomes a partial plan termination? Are layoffs and/or furloughs as a result of COVID-19 taken into account for partial plan termination? Would terminating all employees cause a plan termination? Do you foresee some relief on the partial termination rule?

ANSWER:  The analysis for a partial termination is fact intensive. It is based on the number of participating employees who severed from service during an “applicable period.” The applicable period is the time in which a particular event or circumstance is driving the terminations. In this case, it would be the period of time in which the pandemic is a driving force causing the terminations.

As an example, let’s assume that period is from March 1, 2020 to July 31, 2020—a period of five months. Then assume that some of the participants are laid off and some are furloughed. (For our purposes, “laid off” means that the employees were terminated. But “furloughed” means that the employees weren’t terminated, and were still employees, but weren’t providing services and probably weren’t being paid. As a note, some employers maintain health insurance for furloughed employees, but not for laid off employees.)

If more than 20% were laid off during the applicable, the analysis is fairly simple. The IRS would take the position that the plan had suffered a partial termination. But, what if 15% had been laid off and 25% had been furloughed? It would be hard to tell if a partial termination had occurred until the employer resumed business (in, for example, mid-June). If the employer brings back all of the furloughed employees, there arguably wasn’t a partial termination. But, if the employer only brings back half of the furloughed employees, then the opposite is true.

Also, recognize that different people use those terms differently (e.g., furloughed and laid off). That’s why I defined the terms. The definitions matter in this case.

Finally, a number of trade associations are arguing for relief from the partial termination rule. It’s not clear if that advocacy will produce results.


The CARES Act provisions for coronavirus-related distributions and loans also apply to ESOPs.


QUESTION 9:  Do the CARES Act provisions for coronavirus-related distributions and enhanced participant loans apply to Employee Stock Ownership Plans?


The provisions for coronavirus-related distributions (CRDs) to affected participants (referred to as “qualified individuals”) apply to “eligible retirement plans” as that term is defined in the Code. 

In turn, the Code defines “eligible retirement plan” as, among other plans and accounts, a plan with a qualified trust, that is, a trust which is exempt from tax under section 501(a) and which is part of a qualified plan under section 401(a). That includes ESOPs (which are, by definition, either stock bonus plans or money purchase plans).

The enhanced loan provision (permitting loans up to a participant’s vested account balance, but not to exceed $100,000) apply to any “qualified employer plan” as defined under Code section 72(p)(4). That section covers any plan that is qualified under Code section 401(a), which includes ESOPs.


QUESTION 10:  What are the implications if the plan sponsor terminates a match when they utilize the match true up provision? For instance, if they don’t make the match or freeze the match will they have to do it at the end of the year because of the true up feature?  Does that mean the plan needs to be amended to remove the true up feature in order to truly save the employer match dollars? 

ANSWER:  There isn’t an easy answer to this question. Let me explain.

If the match is truly discretionary, it won’t be put into the plan until the end of the year. In that case (and assuming that this isn’t a safe harbor plan), the plan sponsor can simply decide not to make a match. And, in that case there would not be a need for a true up.

However, if the plan sponsor makes discretionary decisions to match during the year, e.g., quarterly, and has already exercised that discretion to make the matches for the first quarter, there may be a need to “true up” at the end of the plan year, depending on what the plan document says. In my experience, most plans (or Board minutes, in the case of a truly discretionary match) say that the match is to be based on the deferrals by the participants up to a specified percent of pay. In that case, a true up could be required.

Hopefully, most businesses will be operating again in three months or less, and cash flows will be restored, so that this will be a minor issue.


The views expressed here are those of Fred Reish. They should not be construed as investment advice or as the views of Hartford Funds or the employees of Hartford Funds. They are based on available information and are subject to change without notice. The information above is intended as general information and is not intended to provide, nor may it be construed as providing, tax, accounting or legal advice. As with all matters of a tax or legal nature, please consult with your tax or legal counsel for advice. This material and/or its contents are current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Fred Reish.

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