Cares act 401k question

Louisville, KY · Member since 2015 · 166 posts · 83 votes

My wife has been out of work due to the virus. She has a hair salon which has been forced to close down during the pandemic. Does anyone know if I will be able to wave the 10% early withdrawal fee if I take a distribution from my 401k because of the cares act. I didn’t know if it had to be my job that was disrupted or if it could be either.

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George Blower

Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes

Originally posted by @Juan Deshon:

Great info Kevin! It is my understanding also that you qualify for CVD's if you or your dependents are impacted. There is a difference though with 401k loan and a distribution, The Loan to my understanding is not a taxable event unless you do not repay it within the next 5-6 years. A distribution would be a taxable event but no 10% penalty.

Payments on a 401k loan taken under the CARES Act must be paid back starting in 2021 over a 5 year term.

Here are the details regarding the loans:

NEW LOANS:

The CARES Act which was enacted to provide relief to individuals impacted by COVID-19 allows for increased 401k loans and more flexibility for repayment of these loans.

Specifically, you must be an individual who meets one of the following conditions to demonstrate that you have been impacted by the crisis (and it will be your responsibility to retain documents in your files that demonstrates that you are a qualified individual):

- Individual who is diagnosed with COVID-19, with a CDC-approved test;
- Individual whose spouse or dependent is diagnosed with COVID-19, with a CDC-approved test; OR
- Individual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or other factors as determined by the Treasury Secretary.

On or before September 23, 2020, such individuals take a 401k participant loan subject to the following terms:

Maximum Amount of the Loan: 100% of their 401k balance not to exceed $100,000. Please note that per the multiple loan rules, the amount of the loan must be reduced by the highest outstanding balance of any other 401k participant loan over the prior 12 months (regardless of whether such other loan is currently outstanding).
Monthly or Quarterly Payments: The loan must be paid back in equal monthly or quarterly payments of principal and interest.
Interest Rate: The interest rate is equal to prime plus 1% (or CD rate plus 2%) and is a fixed rate that is set at the time that the loan is taken.
Term of the Loan: Five-year term unless the proceeds of the loan are used to purchase a primary residence in which case the term of the loan may be up to 30 years.
First Payment:
- For monthly payments, the first payment that would otherwise be due is delayed until January 2021 (e.g. if the first monthly payment would have been due on May 15, 2020, it will be due on January 15, 2021).
- For quarterly payments, the first payment that would otherwise be due is delayed until the first quarter of 2021 (e.g. if the first quarterly payment would have been due on May 15, 2020, it will be due on February 15, 2021).

EXISTING LOANS:

The CARES Act which was enacted to provide relief to individuals impacted by COVID-19 allows for increased 401k loans and more flexibility for repayment of these loans.

- Individual who is diagnosed with COVID-19, with a CDC-approved test;
- Individual whose spouse or dependent is diagnosed with COVID-19, with a CDC-approved test; OR
- Individual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or other factors as determined by the Treasury Secretary.

If you meet the above conditions:

You may delay making any 401k loan payments due between 3/27/2020 and 12/31/2020.
You must commence making loan payments in January 2021 (or the first quarter of 2021 if your loan payments are due on a quarterly basis).
If you elect to delay making such loan payments, the term of your loan will be appropriately extended. For example, if there are 10 monthly loan payments remaining on your 401k participant loan and the next payment is due April 15, 2020, you can elect to delay making such payments until January 15, 2021 and at that time would need to make 10 more monthly payments through October 15, 2021.

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Kevin Gray
Accountant · Member since 2018 · 43 posts · 37 votes
6y
The guidance from the CARES Act on the Coronavirus Distributions (CVD's) is still very vague, but anyone impacted by the virus (forced closure of a business would qualify) is able to access 401k funds up to $100k as a loan that needs to be repaid in the next few years (the details are available in previous threads or online). If repaid on time, there is no early distribution penalty or taxes.
If the plan is to take retirement funds as a distribution and not pay back, then there's going to be a number of factors that will determine the tax treatment (example: if you're still employed, if it's a 401k with current employer, current financial situation, your age, what the funds are used for, etc...).
A financial advisor or tax professional with all your specific details should be able to help provide a plan to reduce your taxes and penalties accordingly.
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Juan Deshon
Specialist · Houston Tx · Member since 2020 · 34 posts · 16 votes
6y
Great info Kevin! It is my understanding also that you qualify for CVD's if you or your dependents are impacted. There is a difference though with 401k loan and a distribution, The Loan to my understanding is not a taxable event unless you do not repay it within the next 5-6 years. A distribution would be a taxable event but no 10% penalty.
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George Blower
Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
6y
Originally posted by @Juan Deshon:
Great info Kevin! It is my understanding also that you qualify for CVD's if you or your dependents are impacted. There is a difference though with 401k loan and a distribution, The Loan to my understanding is not a taxable event unless you do not repay it within the next 5-6 years. A distribution would be a taxable event but no 10% penalty.

Payments on a 401k loan taken under the CARES Act must be paid back starting in 2021 over a 5 year term.

Here are the details regarding the loans:

NEW LOANS:

The CARES Act which was enacted to provide relief to individuals impacted by COVID-19 allows for increased 401k loans and more flexibility for repayment of these loans.

Specifically, you must be an individual who meets one of the following conditions to demonstrate that you have been impacted by the crisis (and it will be your responsibility to retain documents in your files that demonstrates that you are a qualified individual):
- - Individual who is diagnosed with COVID-19, with a CDC-approved test;
  - Individual whose spouse or dependent is diagnosed with COVID-19, with a CDC-approved test; OR
  - Individual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or other factors as determined by the Treasury Secretary.
On or before September 23, 2020, such individuals take a 401k participant loan subject to the following terms:
- Maximum Amount of the Loan: 100% of their 401k balance not to exceed $100,000. Please note that per the multiple loan rules, the amount of the loan must be reduced by the highest outstanding balance of any other 401k participant loan over the prior 12 months (regardless of whether such other loan is currently outstanding).
- Monthly or Quarterly Payments: The loan must be paid back in equal monthly or quarterly payments of principal and interest.
- Interest Rate: The interest rate is equal to prime plus 1% (or CD rate plus 2%) and is a fixed rate that is set at the time that the loan is taken.
- Term of the Loan: Five-year term unless the proceeds of the loan are used to purchase a primary residence in which case the term of the loan may be up to 30 years.
- First Payment:
  - For monthly payments, the first payment that would otherwise be due is delayed until January 2021 (e.g. if the first monthly payment would have been due on May 15, 2020, it will be due on January 15, 2021).
  - For quarterly payments, the first payment that would otherwise be due is delayed until the first quarter of 2021 (e.g. if the first quarterly payment would have been due on May 15, 2020, it will be due on February 15, 2021).
EXISTING LOANS:

The CARES Act which was enacted to provide relief to individuals impacted by COVID-19 allows for increased 401k loans and more flexibility for repayment of these loans.

Specifically, you must be an individual who meets one of the following conditions to demonstrate that you have been impacted by the crisis (and it will be your responsibility to retain documents in your files that demonstrates that you are a qualified individual):
- - Individual who is diagnosed with COVID-19, with a CDC-approved test;
  - Individual whose spouse or dependent is diagnosed with COVID-19, with a CDC-approved test; OR
  - Individual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or other factors as determined by the Treasury Secretary.
If you meet the above conditions:
- You may delay making any 401k loan payments due between 3/27/2020 and 12/31/2020.
- You must commence making loan payments in January 2021 (or the first quarter of 2021 if your loan payments are due on a quarterly basis).
- If you elect to delay making such loan payments, the term of your loan will be appropriately extended. For example, if there are 10 monthly loan payments remaining on your 401k participant loan and the next payment is due April 15, 2020, you can elect to delay making such payments until January 15, 2021 and at that time would need to make 10 more monthly payments through October 15, 2021.
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Marlen Weber
Specialist · Plano, TX · Member since 2020 · 2k+ posts · 861 votes
6y
@Kevin Gray great information on the CARES Act. Thanks for the clarification.
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