New COVID-Related Rules For Accessing Your 401k
Updated: Apr 18
COVID-19 surprised everyone. As part of the response to COVID, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed. A less-publicized part of the act was the option for employers to offer very lenient 401k distribution and loan options for COVID-related hardship.
One major takeaway for employees is to realize that the new rules are OPTIONAL for employers, not mandatory. It will be up to the discretion of the employer to integrate the new rules into their plans.
If the employer does offer COVID-related Distributions (CRDs), participants must meet one or more of the following conditions:
The participant is diagnosed with the virus (COVID-19) by a test approved by the Centers for Disease Control and Prevention,
The participant’s spouse or dependent is diagnosed with such virus or disease by such a test, or
The participant experiences adverse financial consequences as a result of being quarantined. This includes 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.
As you can see by #3, the criteria to qualify for a CRD is liberal and will encompass a wide swath of people and situations.
CRDs are subject to the following benefits and requirements:
Not subject to the 10% early withdrawal penalty if under age 59.5
Max amount is $100,000
Employers may rely upon self-certification by the employee that they meet one of the qualifying conditions
CRD must be made between January 1 and December 31, 2020
All vested funds are available for distribution
Distribution not subject to 20% mandatory withholding
Distribution can be subject to voluntary withholding of at least 10% or no withholding at all
Income taxes can be spread over three tax years.
CRD can be repaid by rollover contribution over a three-year period (be careful with taxes)
If your 401k plan does not allow CRDs, you can still treat a distribution as a CRD on your 2020 tax return if you meet one of the three CRD conditions. Make sure you keep good records and be prepared to defend your choice to the IRS if audited.
If you don’t like the idea of a distribution from your 401k, then a 401k loan may be a better option. Again, this new 401k-loan possibility is optional for the employer.
If one of the CRD conditions is met, the 401k plan has the option to do the following:
Eligible participants can receive 100% of their vested account balance up to $100,000 – instead of the normal 50% up to $50,000 limit.
CRD-related loans must be requested between March 27, 2020 and September 23, 2020
Eligible participants can delay loan repayments for up to one year
Only for loan repayments due between March 27, 2020 and December 31, 2020
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 401k loans can be extended by the length of the suspension.
COVID-19 came on hard and fast. It naturally instilled a lot of fear and panic in all of us. But before you tap your retirement funds make sure you have a plan in place. It does not have to be a perfect plan but think about what you can control and what the next few months look like.
We all have to make short-term decisions from time to time to survive. The healthy approach is to try and limit any possible long-term harm. This is done by being thoughtful and proactive, not just reactive.
Stay healthy! Try to cultivate beauty every day!