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Who Qualifies for Coronavirus-Related Distributions?

There are plenty of gray areas in the CARES Act's language about CRDs, says contributor Natalie Choate.

Section 2202 of the CARES Act, the giant economic stimulus/disaster relief law enacted in late March 2020, gives favorable tax treatment to certain retirement plan distributions. If a distribution qualifies as a "coronavirus-related distribution," or CRD, the recipient gets the following special breaks:

  • The income tax on the distribution can be spread over three years from 2020-22 at the taxpayer's option.
  • The distribution can be rolled over into an eligible retirement plan at any time within three years (instead of the usual 60 days), and some normal rollover restrictions won't apply. If the taxpayer already paid tax on the distribution, he can get a refund if he later uses the rollover option.
  • The 10% tax on pre-age-59 1/2 distributions does not apply.

If this sounds familiar, that's because this treatment of disaster distributions has been used before, most recently in connection with the 2016-17 named storms and wildfires. Thus, consulting IRS Publication 976, "Disaster Distributions," can help practitioners find their way around the subject.

A taxpayer who qualifies for a CRD can characterize up to $100,000 of his or her 2020 retirement plan distributions as CRDs. The individual qualifies if:

  • The individual "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."
  • Or the individual's "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 the individual "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 Treasury.

Note that one path to CRD qualification is strict and objective: Either the individual (or spouse or dependent) is diagnosed with the applicable virus by the approved test or he/she/they are not so diagnosed.

The other path is the opposite--it is loose and subjective. "Adverse financial consequences" are not defined. Clearly someone losing an entire income as a result of a virus-triggered business closing has suffered substantial adverse financial consequences. But the statute does not require "substantial" consequences--any adverse financial consequences will do. And of course if the individual (or spouse or dependent) received the specified virus diagnosis, no financial hardship need have been incurred.

The retirement plans charged with administering these rules do not have to worry--they can rely on the employee's self-certification that he or she passes the above tests. Of course, the IRS can audit the individual's tax return and treat any fraudulent claims accordingly.

Some people are left out by this definition. For example, qualified plans are not required to even offer CRDs, so presumably some will choose not to. CARES will not be much help to employees of those companies (unless they also own IRAs they can tap). Also, if your pay rate was cut due to the virus, but your hours were unchanged, it does not appear that you can take a CRD. Pay cuts have been a common way to deal with the virus for professional jobs, whereas hours-reduction and furlough have been more often chosen for lower-tier employees. Did Congress intend to make this distinction, or did they just forget about the professional workers?

Another group apparently overlooked: Spouses of furloughed workers. If the stay-at-home spouse owns the retirement plan, and the other spouse is the one who was furloughed, they both endure the adverse financial consequences, but it's not clear if the stay-at-home spouse can take a CRD because the spouse was not the one whose hours were cut.

The Treasury has wide latitude to take care of some of these issues by defining "other factors" that could give rise to CRDs--including hours-reduction that occurred to a family member and/or a pay cut attributable to the pandemic. While it's at it, the Treasury might want to designate "taking a 2020 required minimum distribution prior to enactment of CARES" as an "other factor" that would justify CRD treatment. That move would allow people who took their 2020 RMDs in early 2020, before CARES was even dreamed of, to roll those distributions back into a retirement plan.

Hopefully, the CRD relief provision will help people who need to access their retirement benefits because of the economic stresses of the pandemic. But the genuine need of some does not stop others from "gaming" the CRD provision. The way the law is written, a person who has been diagnosed with COVID-19 (whether or not the bout with the virus was serious, and whether or not there were any adverse financial consequences) could take $100,000 out of his or her IRA, deposit it in a bank account, then roll it into a Roth IRA--and defer the tax on that Roth conversion over three years. To head off that planning idea, the law would have to be fixed to accelerate any deferred tax in case of Roth conversion.

Natalie Choate is an estate planning lawyer in Boston with Nutter McClennen & Fish LLP. Her practice is limited to consulting regarding retirement benefits. The new 2019 edition of Choate's best-selling book, Life and Death Planning for Retirement Benefits, is now available through her website,, where you can also see her speaking schedule and submit questions for this column. The views expressed in this article may or may not reflect the views of Morningstar.

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