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The CARES Act - 401(k) Participant Distribution and Loan Options

Eric Droblyen

December 28, 2022


The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020 in response to the COVID-19 crisis. The Act allows – but does not require - employers to loosen the participant distribution and loan provisions of their 401(k) plan and any Coronavirus-affected individual to reduce the tax burden of most 401(k) distributions. 401(k) participants should understand their options under the CARES Act as soon as possible – this economic relief is temporary.

Below is an overview of the CARES Act’s three major retirement plan provisions. Due to the power of compound interest, 401(k) participants should only take a Coronavirus-related distribution or loan as a last resort.

Coronavirus-Related Distributions

Under the CARES Act, a 401(k) plan can offer “Coronavirus-related Distributions” (CRDs) to participants that meet one or more of the following conditions:

  1. The participant is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention,
  2. The participant's spouse or dependent is diagnosed with such virus or disease by such a test, or
  3. The participant experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.

CRDs are subject to the following requirements:

  • Must be made between January 1 and December 30, 2020 only.
  • Must be capped at $100,000.
  • All vested sources are available for withdrawal.
  • Not subject to the 10% early distribution penalty!
  • Not subject to 20% mandatory withholding.
  • Can be subject to voluntary withholding of at least 10% or no withholding at all.
  • Their related income taxes can be spread ratably over three tax years.
  • They can be repaid by rollover contribution over a three-year period.
  • Employers may rely upon a self-certification by the participant that they meet one of the qualifying conditions.

Important Information – If a 401(k) plan does not allow CRDs, plan participants can still treat almost any distribution as a CRD (corrective distributions being an exception) on their 2020 tax return if they meet one of the three CRD conditions.

High 401(k) Fees

Coronavirus-Related Loans

Under the CARES Act, a 401(k) plan can offer special loan terms to participants that meet one of the CRD conditions.

  • For new loans requested between March 27, 2020 and September 23, 2020.
    • Eligible participants can receive 100% of their vested account balance up to $100,000 – instead of the normal 50% up to $50,000 limit.
    • If a plan does not currently allow loans, all vested sources can be made available.
  • For loan repayments due between March 27, 2020 and December 31, 2020
    • Eligible participants can delay these repayments for up to one year.
    • Delayed loan repayments will need to be re-amortized for accrued interest over the remaining term.
    • The 5-year repayment deadline that generally applies to 401(k) loans can be extended by the length of the suspension.

Required Minimum Distributions

Under the CARES Act, a 401(k) plan can allow any participant – regardless of whether they meet one of the three CRD conditions or not – to waive their Required Minimum Distribution (RMD) during 2020.

If a plan adopts the CARES Act RMD provisions:

  • Eligible individuals include: 1) participants who are 72 or older in 2020, 2) participants who turned 70 ½ in 2019, but delayed their RMD until April 1, 2020, and 3) beneficiaries of an inherited account.
  • Eligible individuals that received 2020 RMD can repay it by rollover within 60 days – assuming the plan accepts indirect rollovers and the individual is eligible to make rollover contributions.

Adopting CARES Act 401(k) Provisions

While employers can begin operating their 401(k) plan under the CARES Act provisions immediately, I generally recommend they hold off on doing so until a participant requests CARES Act relief. The reason - adopting CARES Act provisions in operation will require new participant forms and a formal plan amendment down the road. If the CARES Act provisions are never used, managing these items will be a waste of time.

Don’t lose sight of the future!

No doubt about it – COVID-19 has hit many individuals hard. Many have lost their job or working fewer hours. However, taking a CARES Act distribution or loan should be a last resort for 401(k) participants because the long-term consequences for doing so can be severe:

  • The value of most 401(k) investments has dropped a lot due to the COVID-19 crisis. Selling these investments fund a distribution or loan will lock in investment losses.
  • Due to the power of compound interest, taking a 401(k) distribution or loan taken today could delay a future retirement by years.

A full understanding of the CARES Act’s 401(k) provisions can help individuals make this difficult decision and employers make the provisions their 401(k) participants need available.

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