The CARES Act offered many lifelines to Americans coming to grips with the coronavirus. Among other things, it let people carve money out of their 401(k) plans—to either borrow it or take distributions without the usual penalties, as long as they could show they were suffering financial hardship because of the coronavirus.

But that generous provision came with guidance that critics say has caused confusion, and though the IRS has tried to answer some questions about who can draw down from their plans, a lot of questions remain.

Loans Vs. Distribution
Section 2202 of the CARES Act said that qualified individuals could take up to $100,000 (or the vested balance) out of qualified plans, including 401(k)s, 403(b)s and IRAs, if they or their spouse had contracted Covid-19, if they had been laid off or seen work hours reduced because of the virus, their business had to close, or because a lack of child care kept them out of work. If you qualified, you could take out these moneys in aggregate from your plans from January 1, 2020, to December 30, 2020. While there was no penalty, you did have to pay taxes on these distributions ratably over three years. “For example,” said the IRS in a Q&A, “if you receive a $9,000 coronavirus-related distribution in 2020, you would report $3,000 in income on your federal income tax return for each of 2020, 2021, and 2022.”

You could also pay it all back or roll it over to an IRA within three years of the distribution to wipe your tax slate clean.

The IRS says: “If, for example, you receive a coronavirus-related distribution in 2020, you choose to include the distribution amount in income over a three-year period (2020, 2021, and 2022), and you choose to repay the full amount to an eligible retirement plan in 2022, you may file amended federal income tax returns for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution that you included in income for those years, and you will not be required to include any amount in income in 2022.”

Spouses Left Behind?
But when it comes to who qualifies, plan sponsors have to use certain discretion, and that might leave some people out, according to a white paper on the issue written by attorney Albert Feuer in Forest Hills, N.Y. One of the problems is that a reduction in salary wasn’t taken into account explicitly, even if furloughs were.

“For example, [plan sponsors] will not be able to treat individuals whose work hours have not been reduced, but whose compensation was reduced,” Feuer writes, “or individuals furloughed as a result of the Covid-19 economic downturn, as qualifying individuals, until such guidance is issued.

“Such a constricted interpretation is likely to make employer and plan sponsors look very mean spirited and uncaring by refusing to let participants access the very benefits they have earned at a time when approximately half of the work force has suffered adverse financial consequences from the coronavirus.”

Jennifer Doss, a defined contribution practice leader at CAPTRUST in Raleigh, N.C., said that the Q&A released by the Internal Revenue Service on May 4 cleared up a few things but then muddied a few others. For instance, the wording is currently hazy on what happens to spouses.

“It covers your spouse, but it doesn’t talk about whether your spouse gets laid off or again a reduction in hours. … It addresses if they’re sick but doesn’t address if they have some other impacts.”

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