CARES Act changes to retirement plans.

• Author: Plass, Tommy
• Position: Coronavirus Aid, Relief, and Economic Security Act of 2020

As the COVID-19 pandemic arrived on the nation's shores, Congress discussed ways to pump cash and activity into an economy being ravaged by a microscopic assailant. Many of the levers that are usually used to prop up an ailing economy would likely be less effective in an environment where the number of inactive businesses is as significant as the number of unemployed people. Accordingly, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, to quickly provide relief, including to allow cash from retirement plans--where it might normally be untouchable for decades except at the cost of significant taxes and penalties--to flow into the hands of individuals and families.

This item discusses the 2020 changes to retirement plan distributions and loans made by the CARES Act, as well as tips to take the most tax-efficient advantage of those changes.

Coronavirus-related distributions: Definition and reporting

The CARES Act creates and describes a specific kind of distribution from qualified retirement plans called a "coronavirus-related distribution." Although the distribution must meet all the qualifications to get the benefits of that label, in reality, only the qualifications listed in bullet points 3 and 4 below are exceptional as far as retirement plan distributions go, and their broad language will likely describe many taxpayers' situations. The CARES Act specifically provides that a participant may "self-certify" his or her status as a "qualified individual," and plan sponsors do not need to perform any due diligence on the certification unless they have actual knowledge that contradicts the participant's self-certification.

A coronavirus-related distribution is (CARES Act [section]2202(a)(4)):

1. A distribution made on or after Jan. 1, 2020, and before Dec. 31, 2020;

2. From an eligible retirement plan, which includes individual retirement accounts or annuities under Sec. 408 (IRAs); Sec. 401(k) plans, qualified annuity plans, Sec. 457(b) plans, annuities purchased by Sec. 501(c)(3) organizations, or Roth accounts (Sec. 402(c)(8)(b));

3. To an individual who is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention; an individual whose spouse or dependent is diagnosed with COVID-19; 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 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)"; and

4. Notice 2020-50 subsequently added factors that could qualify a plan participant as a "qualified individual," addressing gaps in the original definition. The additional factors include the plan participant's having a reduction in pay (including self-employment income) due to COVID-19; having a job offer rescinded or...