In this episode, we ask:

The provisions are not automatic.

The CARES Act loan and distribution provisions require employers to adopt those rules, according to Nelson.

So you need to ask whether your employer offers these provisions in your 401(k) plan.

About 75% to 85%  existing 401(k) workplace plans currently offer some type of hardship or loan provision, Nelson says. 

Depending on your needs, you still have options even if your employer doesn’t include the new provisions. Prior rules allow Americans to take out a 401(k) loan of up to 50% of their vested account balance, or a maximum of $50,000. 

To qualify for the retirement distributions or loan provisions, you must have suffered a financial hardship from the pandemic. That includes being diagnosed with Covid-19; subject to quarantine; a business closure or reduce your hours; inability to work due to child-care issues; or if you’re not self employed and were laid off or had hours reduced.

To qualify for the provisions, individuals need to fall into one of two main categories.

You, your spouse, or dependent has been diagnosed with the coronavirus (i.e., SARS-CoV-2 or COVID-19),

If you are a “qualified individual,” up to $100,000 of distributions from IRAs and company savings plan made in 2020 are eligible for relief. IRA and company plan distributions are aggregated for this purpose.

The first relief provision waives the 10% early distribution penalty. That penalty normally applies to IRA or company plan withdrawals if you are under age 59 ½, unless an exception applies. The CARES Act adds a new exception to that penalty but only if you are a “qualified individual.” 

The second relief provision provides relief if your financial situation improves and you no longer need the withdrawn funds. “Qualified individuals” can repay, tax-free, 2020 withdrawals to an IRA or company plan. Repayment must be made within three years of the date the money was received. If you have already paid taxes on a withdrawal that you later decide to repay, you can file an amended tax return to recover the taxes.

In most cases, your withdrawal will be taxable. To cushion the blow of getting hit with the entire tax in the year of distribution, the CARES Act permits you to spread any federal income tax over three years.

In the year 2020.

Loans are not permitted from IRAs, says Denise Appleby, the CEO of Appleby Retirement Consulting. The language you cite, she says, refers to a distribution that can be rolled over within 60-days of receipt – extended to three years for coronavirus-related distributions.

These distributions are not, says Appleby, subject to the terms that apply to loans, such as: level amortized repayments, an interest rate that should be reasonable, a loan agreement, approval by the plan administrator, subject to availability under the terms of the plan

“Therefore, while the IRA distribution can be returned to the IRA or other eligible retirement plan – if eligible as a rollover contribution, it is merely a distribution and not a loan,” says Appleby. (source)

The CARES Act makes it easier for Americans struggling with economic hardship from the coronavirus pandemic to withdraw money from their retirement accounts. 

One provision from The CARES Act allows investors of any age to withdraw as much as $100,000 from retirement accounts including 401(k) plans and individual retirement accounts this year without paying an early withdrawal penalty of 10%. They can avoid taxes on the withdrawal if the money is put back in the account within three years. If it isn’t returned, taxes can be paid over a three year span. 

ESOPs do not have to make these coronavirus-related distributions available because the IRS has indicated that the distributions are permitted, but not required, for any retirement plan. To the extent the special distributions are offered, they must be made in calendar year 2020. (source)

It’s important to note, too, that under what’s known as “the rule of 55,” 401(k) or 403(b) participants who leave their employer for any reason in or after the year they turn 55 are always free to pull money from their plan without paying the 10% penalty.

Yes. However, the tax associated with the distributions may be paid ratably over three years, beginning with the taxable year 2020.

The CARES Act forgives the need to take a required minimum distribution from an IRA for 2020. 

Q: The CARES Act forgives the need to take a required minimum distribution from an IRA for 2020 but neglected to account for those that already took funds out in the first three months of 2020. What should happen in these cases? The simplest solution would be for the IRS to allow people to put back any money that was withdrawn during the first three months of 2020, before the CARES Act was passed. Most IRAs do have a 60-day window to return withdrawn funds but inherited IRAs do not have any window to return funds. What do you think?

A: If it is within 60 days from the date of the distribution of the RMD the funds can be rolled over as long as they are otherwise eligible for rollover, says Sarah Brenner, an IRA analyst with Ed Slott and Company. “That would mean no violations of the once-per-year rollover rule and non-spouse beneficiaries could not roll over an RMD from an inherited IRA,” she says.

Under the CARES Act, you can take out a 401(k) loan for up to $100,000, or if lower 100% of the vested account balance for the next six months. That’s up from a prior limit of $50,000, or if lower 50%. Individual retirement accounts don’t allow loans.

Typically, you have up to five years to repay a 401(k) loan. For 2020, the new provision gives Americans an additional year to pay back the loan, raising the time period to six years. Outstanding loans due between March 27 and Dec. 31 will also be extended by a year.

A 401(k) withdrawal would make more sense for someone who has been laid off and doesn’t have a safety net or enough saved for basic expenses over the next three to six months, they said. 

To be sure, if you lose your job, you could be on the hook for taxes for the amount borrowed for a loan.

It also says savers can take a loan without paying interest or taxes if it is paid back within five years. 

Qualifying individuals under the CARES Act who already have a 401(k) loan may delay repayments due in 2020 for a year, although interest will continue to accrue on those deferred payments.