Can Other Distributions Be Treated as Coronavirus-Related Distributions?

“I read with great interest your Ask the Experts column on required minimum distributions that have already been distributed in 2020 prior to the release of the CARES Act. You stated that ‘presumably, these distributions could be treated as COVID-19 distributions for those who are individuals qualified to receive such distributions under the CARES Act, which would mean that such individuals would have a full three years from the time of distribution to repay the former RMD back to the retirement plan from which it came, or roll over the distribution to another retirement plan or IRA.’ This struck me as particularly interesting, since I then wondered whether ANY type of distribution could be treated as a COVID-19 distribution for those individuals qualified to receive such distributions under the CARES Act? For example, could a refund of an excess deferral be treated as a COVID-19 distribution? How about a Roth conversion? Or is the definition of what qualifies to be a ‘coronavirus-related distribution (CRD)’ not that broad?”

Stacey Bradford, Charles Filips, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

Interesting question, as this is an area that the original Coronavirus Aid, Relief and Economic Security (CARES) Act did leave open to interpretation. Fortunately, the IRS recently released Notice 2020-50 which provided some important clarification in this regard as follows:

“However, any amount described in Q&A-4 of §1.402(c)-2 is not permitted to be treated as a coronavirus-related distribution. Thus, the following amounts are not coronavirus-related distributions: corrective distributions of elective deferrals and employee contributions that are returned to the employee (together with the income allocable thereto) in order to comply with the § 415 limitations, excess elective deferrals under § 402(g), excess contributions under § 401(k), and excess aggregate contributions under § 401(m); loans that are treated as deemed distributions pursuant to § 72(p); dividends paid on applicable employer securities under § 404(k); the costs of current life insurance protection; prohibited allocations that are treated as deemed distributions pursuant to § 409(p); distributions that are permissible withdrawals from an eligible automatic contribution arrangement within the meaning of § 414(w); and distributions of premiums for accident or health insurance under § 1.402(a)-1(e)(1)(i).”

So clearly the definition has some restrictions, including the fact that excess deferrals as well as other types of contribution excesses, cannot be treated as a CRD.

While we do not have similar guidance for Roth in-plan conversions (Notice 2020-50 make no mention of Roth at all), the Experts expect the result would be the same. The IRS recently issued FAQs regarding COVID-19 distributions, specifically stating in Q/A-4 that “[a] coronavirus-related distribution is a distribution that is made from an eligible retirement plan to a qualified individual . . .”, supporting the need for an actual distribution of amounts to an individual, which does not occur with such conversions. Further, as the amounts are not actually being distributed from the plan, there is no argument that the funds are needed for COVID-19 relief—while proof of such need, and the corresponding use of the funds for that reason is not required, an actual distribution seems to be. Although it could be helpful for an individual to be able to take advantage of some of the benefits of a CRD, such as the spread of taxation or avoidance of the 10% early distribution penalty, pending guidance, it seems unlikely these benefits extend to the Roth in-plan conversions.

We note that plan sponsors are permitted to choose the extent to which they amend their plans to provide for CRDs, and qualified individuals may treat a distribution that meets the requirements as a CRD (even if the plan was not amended to treat such distribution as a CRD).

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.