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CARES Act 401k Distributions FAQ

The CARES Act allows a 401(k) plan to provide a coronavirus-related distribution option (CVR Distribution) to plan participants affected by the COVID-19 pandemic. Specifically, a plan participant who is a Qualified Individual can elect one or more CVR Distributions totaling no more than $100,000 during the period beginning January 1, 2020 and ending December 30, 2020.

A Qualified Individual is defined as—

  • an individual diagnosed with the SARS-CoV-2 virus or the disease caused by this virus, COVID-19, with a test approved by the Centers for Disease Control or whose spouse or dependent is so diagnosed;
  • an individual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having his or her work hours reduced, or being unable to work due to lack of child care as a result of SARS-CoV-2 or COVID-19, or as a result of closing a business or reducing hours of a business he or she owns due to this virus or disease; or
  • other factors yet-to-be determined by the Treasury Secretary.

A CVR Distribution has significant tax advantages that are unavailable for other 401(k) plan benefit distributions —

  • the 10% penalty tax for distributions before age 59½ does not apply;
  • unless 0% withholding is elected, 10% federal income tax withholding applies instead of the 20% mandatory income tax withholding that ordinarily applies;
  • the distribution may be included in federal gross income ratably over 3 calendar years beginning with the year when the CVR Distribution is made; and
  • the CVR Distribution may be repaid without interest to the Plan, or an IRA, over the 3 years beginning on the day after it is paid.

The new CVR Distribution option raises lots of questions for our clients. Here are some of these questions and their answers.

Q: Is a 401(k) plan required to offer a CVR Distribution option?

A: No.

Q: If a 401(k) plan offers this option, may the amount of the CVR Distribution be less than $100,000?

A: Yes. For example, a 401(k) plan might provide that a participant can elect CVR Distributions totaling $50,000 instead of the $100,000 limit provided by the CARES Act for CVR Distributions.

Q: Is a participant who experiences adverse financial consequences from a pay cut as a result of SARS-CoV-2 or COVID-19 a Qualified Individual?

A: No. A pay-cut alone, without a reduction in hours, for example, does not result in Qualified Individual status.

Tags: COVID-19 Rapid Response Team, Labor and Employment
  • Jan A. Steinhour

    Jan is attuned to the complex business and legal benefits challenges public and private sector clients regularly face today.

    Jan Steinhour practices in the area of employee benefits planning, ‎administration, and compliance. Her employee benefit plan experience includes ...

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