Skip to Main Content
Services Talent Knowledge
Site Search


Our attorneys stay on top of changes in legislation, agency regulations, case law, and industry trends—then craft timely legal alerts to keep clients up to date on legal developments important to their business.

April 3, 2020

New in-Service Distribution Event: Coronavirus-Related Distributions

Signed into law on March 27, the Coronavirus Aid, Relief, and Economic Security (CARES) Act authorizes “eligible retirement plans” to offer a new in-service distribution option: a “Coronavirus-related distribution” (CRD) to participants, including furloughed employees, impacted by COVID-19. The term “eligible retirement plan” includes IRAs, qualified retirement plans (e.g., 401(k) and pension plans), 403(b) plans, and governmental 457(b) plans. Section 457(b) plans maintained by tax-exempt employers are not eligible. While this alert refers to a CRD as new form of in-service distribution option, a distribution triggered by an employee’s termination may be treated as a CRD if it meets the requirements discussed later in this alert.

Action Item

Employers should carefully weigh the advantages and disadvantages before choosing to authorize in-service CRD distributions.

While this new distribution option can deliver needed assistance to employees adversely impacted by COVID-19, enabling employees to withdraw substantial amounts from their retirement accounts has the potential to severely impact an employee’s retirement security.  Further, now is not the ideal time to liquidate account balances invested in assets whose value may be likely to fluctuate on a weekly, if not daily, basis.

As an alternative, employers should consider amending their plans to add other permissible in-service distribution options not currently available to plan participants or expand existing plan options (e.g., hardship distributions).

This alert is designed to facilitate a plan sponsor’s decision-making process.

Plan Amendments

Plan sponsors may operationally authorize in-service CRDs, however, retroactively effective amendments will be due by the last day of the first plan year beginning on or after January 1, 2022 (January 1, 2024 for governmental plans). This means that the amendment deadline for calendar year plans is December 31, 2022 (December 31, 2024 for governmental plans). Plan amendments to add or expand in-service distribution options other than CRDs will need to be adopted by December 31, 2020 (for calendar year plans).


This alert only addresses distribution options that are likely to alleviate the needs of employees and their dependents impacted by COVID-19. This alert does not address other kinds of permissible in-service distribution options such as, for example, qualified reservist distributions or the new SECURE Act withdrawals for birth or adoption. This alert also does not address in-service distribution options (other than CRDs) from money purchase and defined benefit pension plans. CRDs are available from money purchase and defined benefit pension plans.

401(k) Plan Distribution Events

The Internal Revenue Code limits the circumstances under which 401(k) plans may allow for distributions. The rules differ by money source as follows:

  • A 401(k) plan may permit nonelective employer contributions and matching contributions (other than QNECs and QMACs) and related earnings to be distributed after the attainment of a specified age (which may be younger than 59 1/2), the expiration of a fixed number of years following the date of the contribution (which generally must be at least two years from that date), or upon the occurrence of any other stated event such as, for example, disability, hardship, layoff, furlough, illness, or completion of a specified period of plan participation (e.g., five years of participation).
  • Elective deferrals, QMACs, and QNECs may be distributed when a participant has a “severance from employment.” Prior to a participant’s “severance from employment,” a plan may permit a distribution of these amounts only upon attainment of age 59 1/2, disability, or financial hardship. For this purpose, a “severance from employment” occurs when a participant ceases to be employed by the employer that sponsors the plan and any employer that is a member of the plan sponsor’s controlled or affiliated service group.
  • There are no restrictions (other than plan-imposed restrictions) on the distribution of a participant’s rollover contributions and related earnings if the contributions and related earnings are separately tracked within the plan. In other words, rollover accounts may be distributed at any time and for any reason if a plan allows.

403(b) Plan Distribution Events

The Internal Revenue Code has similar rules that limit the circumstances under which 403(b) plans may allow for distributions. The rules differ by money source and whether the funds reside in a custodial account or annuity contract as follows:

  • A 403(b) plan may permit nonelective employer contributions (other than QNECs and QMACs) and related earnings held in an annuity contract to be distributed for the same reasons and generally under the same rules that apply to these money sources under 401(k) plans.
  • Nonelective employer contributions (including QNECs and QMACs) held in a custodial account may also be distributed when a participant has a “severance from employment.” However, prior to a participant’s “severance from employment,” a 403(b) plan may permit a distribution of these amounts only upon attainment of age 59 1/2 or disability. In-service hardship distributions of nonelective employer contributions are not available from a 403(b) custodial account arrangement.
  • Elective deferrals, including designated Roth contributions, held in a 403(b) plan may be distributed when a participant has a “severance from employment.” Prior to a participant’s “severance from employment,” a plan may permit a distribution of these amounts only upon attainment of age 59 1/2, disability, or financial hardship. The same rules apply whether the amounts are held in an annuity contract or custodial account. These restrictions do not apply to pre-1989 elective deferrals excluding earnings. Unlike the rules pertaining to 401(k) plans, earnings on elective deferrals are not available for 403(b) hardship distributions.
  • As with 401(k) plans, some or all of a participant’s separately tracked rollover account may be distributed at any time and for any reason if authorized under the terms of a plan.

The term “severance from employment” has a different meaning for 403(b) plan purposes. For this purpose, a participant has a severance from employment even if the participant continues employment with an employer that is a member of the plan sponsor’s controlled group as long as that employer is not eligible to maintain a 403(b) plan (e.g., a “for-profit” affiliate).

Hardship Distribution Rules

Existing safe harbor hardship distribution rules applicable to 401(k) and 403(b) plans may be of limited utility in addressing COVID-19 impacts. Under the safe harbor rules, hardship distributions can be used to cover the following types of expenses up to the amount of the expense plus taxes:

  •  Medical expenses for the employee, the employee’s spouse, the employee’s dependents, and the employee’s primary beneficiary
  •  Burial and funeral expenses of the employee’s deceased parent, spouse, children, dependents, or primary beneficiary
  •  Payments necessary to prevent eviction from the employee’s principal residence or to prevent mortgage foreclosure
  •  Expenses and losses, including loss of income, incurred by the employee as a result of a disaster declared by the Federal Emergency Management Association (FEMA). To date, the FEMA has declared New York and New Jersey and several other states as COVID-19 disaster areas.

While these are all potentially applicable safe harbor hardship distribution events, plan sponsors may wish to expand the permitted events to include immediate and heavy financial needs related to COVID-19. An employer that chooses to do so must adopt an amendment by the last day of the plan year.

The “Coronavirus-Related Distribution” (CRD)

As noted above, the CARES Act permits qualified retirement plans, IRAs, and governmental 457(b) plans to make in-service CRDs up to $100,000. An employer may establish a limit on the availability of in-service CRDs that is lower than the maximum. The source of money restrictions that apply to 401(k) and 403(b) plans are not applicable; CRDs can be made from any money source within a plan. The $100,000 limit applies across all plans of all members of a controlled or affiliated service group; therefore, employers who choose to permit in-service CRDs need to monitor CRD distributions from all plans within the controlled group.

What Is a CRD?

A CRD is a distribution from an eligible retirement plan that meets the following requirements:

  • The distribution occurs on or after January 1, 2020, and before December 31, 2020
  •  The distribution is to an individual:
    • Who is diagnosed with the virus SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention
    • Whose spouse or “Code Section 152 dependent” has been diagnosed with COVID-19
    •  Who experiences adverse financial consequences because of one of the following: due to COVID-19: 
      • The individual was quarantined, furloughed, or laid off
      • The individual’s work hours were reduced
      • The individual was unable to work because of the lack of childcare
      • The business that the individual owned or operated was curtailed or closed 

The US Department of the Treasury secretary has the authority to consider other factors in addition to those referenced above.

Employers may rely on an employee’s certification regarding any of the three circumstances above in determining whether the distribution is a CRD.  In other words, an employee isn’t required to prove the need for the money to get it.  It is not clear whether reliance is permitted in the unlikely event the employer has actual knowledge that the employee’s certification is untrue.

Advantages of CRDs

CRDs enjoy a number of advantages not enjoyed by other plan distributions:

  •  CRDs are not subject to the 10-percent additional tax on distributions even if the participant is younger than age 59 1/2. This is the case even if the distribution is made under a distribution provision that is not designed for CRDs (e.g., distributions upon severance from employment, age 59 1/2, and hardship) provided the distribution otherwise qualifies as a CRD.
  •  As with hardship distributions, CRDs are not subject to mandatory federal income tax withholding (currently 20 percent of the taxable portion of the distribution). However, withholding at the rate of 10 percent will apply unless the participant elects not to have withholding apply.
  •  At any time during the three-year period that begins on the day after the distribution is received, participants may repay some or all of a CRD to the distributing plan or contribute the CRD to another eligible retirement plan to which a rollover contribution could be made (e.g., an IRA). Restorative payments can be made in installments if payments in the aggregate do not exceed the amount of the CRD. It is not clear whether (and, if so, under what circumstances) a distributing plan is required to permit an employee or former employee who remains a participant in the plan to make a restorative contribution. It is also not clear whether (and, if so, how) restorative payments can be  made on a “before-tax” basis. Future guidance is needed.
  • CRDs are taxed ratably over three-year period commencing with the year of distribution unless the employee chooses to include the distribution in income in the year the distribution is received.


Employers should not make the decision to authorize in-service CRDs without giving careful thought to the pros and cons of CRDs and other permissible in-service distribution options.

If you have any questions regarding the content of this alert, please contact Art Marrapese, Employee Benefits Practice Area chair, at or another member of the firm’s Employee Benefits Practice Area.

We also have a specific team of Barclay Damon attorneys who are actively working on assessing regulatory, legislative, and other governmental updates on non-trademark-related COVID-19 matters and who are prepared to assist clients. You can reach our COVID-19 Response Team at 


Click here to sign up for alerts, blog posts, and firm news.

Featured Media


CDPAP Providers Get First Look at the Future of CDPAP Without FIs


New York State Fiscal Year 2025 Budget: Implications for Employers Unpacked


Lab Providers Under Increased Scrutiny From Civil and Criminal Agencies for OTC COVID-19 Test Claims


NYS Appellate Court Dismisses Claim Based on Material Misrepresentations in Insurance Application


It's Not Over Yet. Turning Your Judgments Into Dollars.


Website Accessibility Lawsuits: Several "Tester" Plaintiffs—Danso, Martinez, Hedges, Thorne, Genwright, and Donet—Targeting Businesses in Recent Flurry of Lawsuits

We're Growing in DC!

We’re excited to announce Barclay Damon’s combination with Washington DC–based Shapiro, Lifschitz & Schram. SLS’s 10 lawyers, three paralegals, and four administrative staff will join Barclay Damon while maintaining their current office in DC’s central business district. Our clients will benefit from SLS’s corporate, real estate, finance, and construction litigation experience and national energy-industry profile, and their clients from our full range of services.

Read More

This site uses cookies to give you the best experience possible on our site and in some cases direct advertisements to you based upon your use of our site.

By clicking [I agree], you are agreeing to our use of cookies. For information on what cookies we use and how to manage our use of cookies, please visit our Privacy Statement.

I AgreeOpt-Out