Rolling over a COVID-19 early withdrawal

Trying to formulate a list of reasons why people should NOT use CARES’ early-withdrawal penalty exception to take money out of a 401(k) and roll it to an IRA.

My guiding precept is that COVID-19 withdrawals are hardship withdrawals, and thus not eligible rollover distributions.

Assuming I am right on that, and someone tries to indirectly roll the COVID-19 withdrawal to an IRA in a very short span of time, there arguably wasn’t a real hardship in play. I then see four problems:

1.) The withdrawal is retroactively assessed the 10% penalty;
2.) The rollover is disallowed, making the withdrawal fully taxable;
3.) The rollover is treated as an excess IRA contribution, subject to the annual 6% penalty; and
4.) If the client filed a Form 5329 to waive the penalty originally, they falsified tax forms submitted to the IRS, didn’t they?

Any other issues I am missing?

Please and thank you!



  • Caronavirus-related distributions are NOT hardship distributions. They are a one year special distribution ability with the 72(t) 10% penalty waived, additional  income tax and rollover benefits.

(B) CORONAVIRUS-RELATED DISTRIBUTIONS TREATED AS MEETING PLAN DISTRIBUTION REQUIREMENTS.— For purposes of the Internal Revenue Code of 1986, a coronavirus-related distribution shall be treated as meeting the requirements of sections 401(k)(2)(B)(i), 403(b)(7)(A)(i), 403(b)(11), and 457(d)(1)(A) of such Code and section 8433(h)(1) of title 5, United States Code.

CVDs may sound similar to hardship distributions, but there are enough differences that Congress decided to offer CVDs based on the existing natural disaster rules, which are vastly different than hardship distributions in the following respects.

  • Limit is 100k, not limited by the extent of a specific financial need or too selected portions of a balance
  • Retroactive to 1/1/2020 with no mandatory withholding
  • Rollover eligible for up to 3 years
  • Taxable income may be reported over 3 years
  • Qualification attained just by taxpayer, spouse or dependent testing positive with no financial hardship; if quarantined, salary likely to be continued due to the PPP program
  • Employee can self certify without presenting documentation
  • IRS is expected to further broaden the eligibility requirements by regulation.
  • Therefore, this is so broad that there are likely to be very few disqualified distributions resulting in excess contributions.

Thanks.  Then I guess I’ll rephrase my question – are natural-disaster-related early withdrawals from a 401(k) able to be rolled over, either directly or indirectly, into an IRA?I guess I just see the potential for clients to be advised to “raid” their 401(k) accounts via a COVID-19 exception, and roll it straight to an IRA.  These withdrawals are, arguably, meant to be spent, not dumped right back into another qualified vehicle.  Small plans will get killed if this is adopted as a “strategy”.  One might argue that it violates what the exception under CARES was intended to accomplish.

I agree with you in principle. The natural disaster related distributions could also have been rolled over to an IRA, and it appears the IRS will eventually release a publication for CV distributions similar to Pub 976 dedicted to disaster distributions. In general, these disasters and CV distributions are allowed to kick many existing rules to the side. In the process I expect that some qualified plans will be “raided” to take advantage of the broad distribution options which invite strategic planning to escape certain plans. That said, none of these plan are required to allow CV distributions, and those that feel vulnerable probably will not.

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