Accessing Your Retirement Plan for Coronavirus Relief: How the CARES Act Amends 401K Rules for Plan Distributions and Loans

Posted on April 16, 2020, by Jonathan Lewis

With a large portion of the workforce grappling with unemployment or reduced income as a result of the COVID-19 crisis, many Americans are looking to their retirement savings and pondering whether to use these funds as a fallback measure. With the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), enacted on March 27, 2020, the federal government has recognized the extraordinary strain facing many Americans and amended rules which were put in place to disincentivize plan withdrawals in times of economic hardship. 

Coronavirus-Related Distributions

Before the CARES Act’s special measures, premature distributions from a 401(K) plan were not only subject to ordinary income tax, but were also subject to an additional 10% early withdrawal penalty, with mandatory withholding. Under the CARES Act, an employee can receive a distribution from their retirement plan, or plans, of up to $100,000, any time in 2020. Distributions may be taken from multiple sources, such as a qualified retirement plan or an IRA, as long as they do not exceed $100,000.00 in aggregate. These distributions are exempt from the 10% early withdrawal penalty, can be included in the employee’s income tax over three years, and are not subject to mandatory 20% withholding typically applicable to direct plan distributions. 

In order to qualify, distributions taken pursuant to the CARES Act must be coronavirus-related, meaning that an employee must certify that a qualifying condition is the reason for taking the distribution. Plan sponsors are permitted to rely on employee certifications, provided they do not have knowledge that the representations therein are false. No documentation or record-keeping is required of the sponsor. Qualifying conditions are:

1. 1. the employee, or their spouse or dependent, was diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention (CDC), or
   2. the employee is experiencing adverse financial consequences related to COVID-19 as a result of:
      1. being quarantined;
      2. being furloughed, laid off, or having reduced work hours; 
      3. being unable to work due to lack of child care;
      4. closing or reducing hours of a business owned or operated by the employee; or
      5. other factors as determined by the Secretary of the Treasury. 

Unlike typical hardship withdrawals, coronavirus-related distributions may be repaid to the plan within three years and are not subject to taxation if repaid within that window of time. Amounts repaid are treated as a rollover contributions to the plan and are not subject to the employee’s annual contribution limit. Qualifying plan distributions are available through December 31, 2020. 

Modifications to Participant Loans

The CARES Act also modified the rules for participant loans to allow plan sponsors to permit a greater maximum amount of new plan loans, and to permit individuals with existing plan loans to defer their repayment obligations through the end of the year. 

Plan sponsors may permit participant loans taken on or before September 23, 2020, up to a maximum amount of $100,000 (up from $50,000.00), for those employees who certify a qualifying condition (as discussed above). While previous rules restricted an employee from borrowing more than 50% of their vested balance, the CARES Act permits loans of up to 100% percent of an employee’s vested balance, up to the $100,000.00 limit.

In addition, the CARES Act allows participants with outstanding 401(K) loans to delay repayments that would otherwise be due between March 27, 2020, and December 31, 2020, for one year, with the maximum 5-year repayment period of the loan also extended for one year.

Waiver of Required Minimum Distributions (“RMD”)

In recognition of the substantial impact the coronavirus has had on the stock market, the CARES Act also makes provisions to allow retirees who do not want to liquidate their investments at a low point to avoid taking the RMD mandated for individuals over the age of 70 ½ with qualified retirement plans or IRA accounts. 

For all retirement plan participants and IRA owners (not just those with a qualifying condition), the CARES Act eliminates the requirement that required minimum distributions be taken in 2020. The CARES Act also extends by 1 year the period over which distributions must be made due to an employee’s or IRA owner’s death.

If you have questions regarding how the CARES Act or other issues related to this ongoing pandemic may affect you or your business, contact the attorneys at Massey Law Group for a consultation.

The above is intended to inform firm clients and friends about recent developments in the law, including analysis of statutes and new case decisions. This update should not be construed as legal advice or a legal opinion, and readers should not act upon the information contained herein without seeking the advice of legal counsel.