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By Ian Berger, JD
IRA Analyst

The Coronavirus Aid, Relief, and Economic Recovery (CARES) Act continues to cause confusion. In the April 22, 2020 Slott Report, we discussed four misconceptions surrounding the new law. In this article, we add one more: If your employer refuses to offer CRDs, you can’t qualify for the special CARES Act tax breaks.

This statement is false.

The CARES Act allows workplace retirement plans [e.g., 401(k), 403(b) and governmental 457(b) plans] to offer a new kind of distribution – a coronavirus-related distribution (CRD). CRDs offer several tax breaks. If you are under age 59 ½, you are exempt from the 10% early distribution penalty. You may also spread taxes on the CRD over three years and/or recoup any taxes paid by contributing the CRD back to your plan or to an IRA and filing amended tax returns.

CRDs are not available to everyone. Under current rules, you are eligible only if you are a “qualified individual” under the following definition:

  • you are diagnosed with the SARS-CoV-2 or COVID-19 virus by a test approved by the    CDC;
  •  your spouse or dependent is diagnosed; or
  •  you experience “adverse financial consequences” on account of:

    – being quarantined;

    – being furloughed or laid off or having work hours reduced;

    – being unable to work due to lack of child care; or

    – closing or reducing hours of a business you owned or operated.

The IRS has said that it may expand these categories, but that has not happened yet.

If a plan offers CRDs, they are available in addition to normal plan distributions, such as hardship withdrawals or age 59 ½ distributions. But plans are not required to offer this new distribution option, and some have chosen not to.

However, just because a plan does not offer CRDs doesn’t mean that you can’t treat a normal plan distribution as a CRD – as long as you are a “qualified individual.”  In other words, you are not necessarily bound by whether your employer plan treats a distribution as a CRD. If you meet the definition of a “qualified individual,” you can still use the special tax breaks for 2020 distributions of up to $100,000.

Example: Jasmine, age 50, participates in a 401(k) plan that allows hardship withdrawals. Her employer has decided not to offer CRDs. Jasmine is a “qualified individual” because her husband has been diagnosed with COVID-19. She qualifies for and takes a hardship withdrawal of $40,000 from the plan on July 1, 2020. Even though the plan does not offer CRDs, Jasmine can treat her hardship withdrawal as a CRD and qualify for the special tax relief. Therefore, Jasmine will not be subject to the 10% early distribution penalty. She can also spread taxation of the withdrawal equally over three years and repay it within three years.

Keep in mind that any CRDs from your IRA are aggregated with CRDs from company plans for purposes of the $100,000 limit.