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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.

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