Skip to content

Broker-Dealer Regulation & Litigation Insights

  • About Us
  • Contributors
  • Resources
  • Presentations
  • Visit the Faegre Drinker website

CARES Act: Special Distributions to Qualified Individuals

The 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
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.
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.*
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.
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.

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:

  • Employers need to understand the rules applicable to these special distributions;
  • 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.
  • 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:

  • Is the participant a qualified individual?
  • 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?
  • Are there other alternatives that might be considered?
  • 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.

_______________

*  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.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

Subscribe and Receive Alerts to New Articles

SUBSCRIBE
June 17, 2020
Written by: Fred Reish and Megan E. Hladilek
Category: IRA, Retirement Account
Tags: 401(k), 403(b), CARES Act

Post navigation

Previous Previous post: The Second Circuit Hears the Reg BI Challenge Oral Argument
Next Next post: The Second Circuit Upholds Reg BI

Subscribe to Alerts

Recent Posts

  • New Year’s Priorities: FINRA Releases its 2023 Report on its Examination and Risk Monitoring Program
  • Managing IRAs: Charging Different Fees for Different Investments
  • FINRA Is Conducting a Targeted Exam of “Crypto Assets”
  • Recent State Fiduciary and Best Interest Developments
  • Rollover Recommendations – Do the SEC and DOL Requirements Align?

Categories

  • 12b-1 Fees
  • 3270
  • 3280
  • 3290
  • Anti-Money Laundering
  • Arbitration
  • BD
  • Best Execution
  • Best Interest Contract Exemption
  • Best Interest Standard of Care
  • Business Continuity Planning
  • Churning
  • Class Certification
  • Compensation Issues
  • Compliance
  • Concurrent jurisdiction
  • Conflicts of Interest
  • Congress
  • Covered class actions
  • Covered securities
  • Credit
  • Cryptocurrencies
  • Customer Due Diligence Rule
  • Customer Protection
  • Cybersecurity
  • Dark Pools
  • Data Integrity
  • DOL Fiduciary Rule
  • Elder Abuse
  • Enforcement
  • Event Study
  • Examination
  • Exchange-Traded Funds (“ETF”)
  • exemptions
  • Fair Pricing
  • Fees
  • Fiduciary
  • Fiduciary Duty
  • Financial Services
  • FinCEN
  • FINRA
  • FINRA 2018 Annual Regulatory and Examination Priorities Letter
  • FINRA 360
  • FINRA Code of Arbitration Procedure 12204
  • FINRA Code of Arbitration Procedure 13204
  • FINRA Notice 13-45
  • FINRA Regulatory Notice 16-25
  • FINRA Rule 12200
  • FINRA Rule 13200
  • FINRA Rule 2111
  • FINRA Rule 2165
  • FINRA Rule 2232
  • FINRA Rule 3310(c)
  • FINRA Rule 4210
  • FINRA Rule 4512
  • FINRA Summary Report
  • Fixed Income
  • Fraud
  • Goldman v. City of Reno, 747 F.3d 733(2014)
  • Goldman v. Golden Empire Schools Financing, 767 F.3d 210(2014)
  • IA
  • Impartial Conduct Standards
  • In the Matter of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Respondent (AWC 2009020188101/January 25, 2012)
  • Initial Coin Offerings
  • Investment Recommendation
  • Investor
  • IRA
  • Liquidity
  • Manipulation
  • Margin
  • Market Access
  • Market Access Controls
  • Mortgage
  • Mutual Funds
  • New FINRA Rule
  • OCIE
  • Office of the Solicitor General
  • Options
  • Outside Activities
  • Outside Business Activities (“OBA”)
  • Policies and Procedures
  • Price Impact
  • Private Securities Transactions (“PST”)
  • Private Securities Transactions of an Associated Person”
  • Prohibited Transactions
  • Prudence
  • Quantitative Suitability
  • Reading Health v. JP Morgan, No. 16-4234 (3d Cir. Aug. 7, 2018)
  • Reasonable Fees
  • Recommendation
  • Regulation Best Interest
  • Regulation SHO
  • Regulatory Notice 18-13
  • Retirement Account
  • Risk
  • Rollovers
  • SEC
  • SEC 2018 National Exam Program Examination Priorities
  • SEC Reg BI
  • SEC RIA Interpretation
  • Securities Act of 1933
  • Securities Class Action
  • Securities Litigation Uniform Standards Act of 1998 (SLUSA)
  • Senior Safe Act
  • Seniors
  • Service Providers
  • Short Sales
  • Suitability
  • supervision
  • Supreme Court
  • Surveillance
  • Technology Governance
  • UBS v. Carilion Clinic, 706 F.3d 319(2013)
  • Uncategorized
  • Unit Investment Trusts (“UIT”)
  • Verification of Assets and Liabilities

archives

  • 2023
    • February 2023
    • January 2023
  • 2022
    • December 2022
    • November 2022
    • October 2022
    • September 2022
    • August 2022
    • July 2022
    • May 2022
    • April 2022
    • March 2022
    • February 2022
    • January 2022
  • 2021
    • December 2021
    • November 2021
    • October 2021
    • August 2021
    • July 2021
    • May 2021
    • April 2021
    • March 2021
    • February 2021
    • January 2021
  • 2020
    • December 2020
    • November 2020
    • October 2020
    • September 2020
    • August 2020
    • July 2020
    • June 2020
    • May 2020
    • April 2020
    • March 2020
    • February 2020
    • January 2020
  • 2019
    • December 2019
    • November 2019
    • October 2019
    • September 2019
    • August 2019
    • July 2019
    • June 2019
    • May 2019
    • April 2019
    • March 2019
    • February 2019
    • January 2019
  • 2018
    • December 2018
    • October 2018
    • September 2018
    • August 2018
    • July 2018
    • June 2018
    • May 2018
    • April 2018
    • March 2018
    • February 2018
    • January 2018
  • 2017
    • December 2017
    • November 2017
    • October 2017
  • About Us
  • Contributors
  • Resources
  • Presentations
  • Visit the Faegre Drinker website

© 2023 Faegre Drinker Biddle & Reath LLP. All Rights Reserved. Lawyer Advertising.
Privacy Policy

We use cookies to improve your experience with our website. By browsing our site, you are agreeing to the use of cookies. For more information about how we use cookies, please review our privacy policy and cookie policy. OK
Privacy & Cookies Policy

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary
Always Enabled
Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information.
Non-necessary
Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. It is mandatory to procure user consent prior to running these cookies on your website.
SAVE & ACCEPT