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CARES Act FAQs for Employees

More details about the special distributions and loan provisions made possible by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Articles by Betterment Editors
By the Editorial Staff Betterment Resource Center Published Apr. 30, 2020
Published Apr. 30, 2020
5 min read

Q: What is a Coronavirus-Related Distribution (CRD)?

A: This is a new type of distribution available to 401(k) and other retirement plans to provide relief to those financially impacted by COVID-19. CRDs will enable eligible individuals to:

  1. Take a distribution of up to $100,000 in aggregate from 1/1/2020 – 12/30/2020;
  2. Avoid the usual 10% early withdrawal penalty;
  3. Elect to repay the distribution within 3 years from receipt of the distribution to avoid owing any taxes on the distribution.

Q: How do I know if I’m eligible to take this distribution?

A: First, confirm you meet at least one of the following:

  1. You have been diagnosed with COVID-19
  2. Your spouse or dependent has been diagnosed with COVID-19
  3. You are experiencing financial hardship as a result COVID-19 including being quarantined, furloughed, laid-off, having to work reduced hours, or having lost childcare.

If you meet these eligibility requirements, the next step is to contact your employer to confirm if your 401(k) plan allows (or plans to allow) for CRDs.

Q: How much can I take as a CRD?

A: You are able to take up to the lessor of 100% of your vested balance (amount that you own outright) or $100,000 in aggregate across all tax-qualified defined contribution plans. This means that you can take a one time distribution up to $100,000 or multiple distributions until 12/30/2020, as long as the aggregate amount does not exceed $100,000.

Q: What happens if I want to withdraw my entire account?

A: Many employees will want to take a full distribution of their account. However, as stated above, the maximum will be 100% of the vested balance. If your account includes unvested employer matching or profit-sharing contributions, those amounts are not available to be withdrawn. Note that if your account is 100% vested and you withdraw your entire balance, the amount you receive in your bank account may be slightly more or slightly less than you requested due to market movements.

Q: What are the tax implications of the CRD?

A: Generally, any distributions taken prior to age 59-½ are subject to a 10% early withdrawal penalty. The IRS has waived this 10% penalty for CRDs. Additionally, distributions are normally also subject to 20% federal tax withholding. You may have this withholding waived by electing to opt out on the CRD form. The distribution will be counted as taxable income unless you choose to repay the amount in full within three years from the date you receive the funds.

Q: What are the tax implications if my CRD included any Roth funds?

A: Roth 401(k)s distributions are not subject to any tax withholding if you are at least age of 59-½ and have contributed to your Roth account for at least 5 years. If you do not meet these criteria, the distribution will be considered “unqualified,” and the earnings portion of the Roth 401(k) would be subject to taxation. However, as noted above, you can opt out of withholding at the time of CRD.

Q: I was terminated earlier this year, can I still take a CRD?

A: Yes! If your plan allows CRDs, terminated employees are eligible to take a CRD from their account and are subject to the same rules. Please contact your prior employer to learn more about your options.

Q: How do I make repayments on the CRD and what happens if I don’t make the repayments in the given 3-year period?

A: We are working on a process to enable you to repay your CRD directly via ACH and will communicate these details when they are available. Betterment will notify you once this repayment process becomes available. Any distribution amount that is not repaid will be treated as regular income that can be spread over three years for tax purposes. These adjustments can be made on each year’s tax-return filing.

Q: Are CRDs eligible for rollover?

A: No, you will not be able to roll your CRD over to another qualified account. However, if you decide to repay your CRD, it will go back into your 401(k) account and will be treated as a distribution eligible for rollover (direct trustee-to-trustee transfer).

Q: If my plan allows for hardships, can I request a hardship distribution under FEMA declared disasters?

A: To determine whether or not you are eligible for this kind of distribution, please refer to FEMA’s disaster declarations, which states that these distributions are only allowed for employees in an area “designated for individual assistance” as a result of FEMA disaster declaration. However, this may be an evolving situation.

Q: Can I take a loan against my 401(k) Plan?

A: If your 401(k) plan includes a loan provision, the usual available loan amount is the lesser of $50,000 or 50% of your vested account balance.

However, the CARES Act relaxed 401(k) loan provisions by increasing the maximum loan amount to the lesser of $100,000 or 100% of your vested balance. You are eligible for the higher available loan amounts if you meet at least one of the criteria below AND your plan intends to offer these relaxed loan provisions:

  1. You have been diagnosed with COVID-19
  2. Your spouse or dependents have been diagnosed with COVID-19
  3. You have been experiencing financial hardship as a result of COVID-19 including being quarantined, furloughed, laid-off, and or having to work reduced hours, or having lost childcare.

To confirm your plan provisions, please review your plan summary description and/or contact your plan sponsor.

Q: What is the maximum loan amount I can take?

A: The new CARES Act allows employees to take up to the lesser of 100% of the vested balance or $100,000. This is a temporary increase over the usual 50% of vested balance or $50,000. The increased loan limit is only applicable to loans initiated from March 27, 2020 to September 23, 2020 (180-day period).

Q: What are the repayment rules?

A: Employees with 401(k) loan repayments on new or existing loans due between March 27, 2020 and December 31, 2020 can elect to delay them for one year. Interest (that you effectively pay back to yourself) will continue to accrue, but the term of the loan may be extended by one year. Delayed repayments will mean that loans will need to be reamortized, but additional governmental guidance is needed before we can communicate specifics.

Q: Can I take additional loans on top of my personal 401(k) loan that’s currently outstanding?

A: If your plan provisions only allow for one loan at a time and you currently have an outstanding loan, you are not eligible to take another loan until your outstanding loan is paid off. Please note that this is not a new type of loan – it is a temporary increase in the allowed amount available.

Q: Will there be a different interest rate applied to my loan if I delay my repayments for a year?

A: The same interest rate will continue to apply to any delayed repayments, but interest will continue to accrue during this period which may increase the total loan repayment amount. To help ease the financial impact, the maturity date of the loan may be extended up to one year.

Q: How long will CRDs and relaxed loans be available for?

A: CRDs are available from January 1, 2020 to December 30, 2020. The relaxed loans are available until September 23, 2020. The one-year postponement of loan repayments is only applicable for repayments due between March 27, 2020 and December 31, 2020.

Note that these provisions are not automatically available to all 401(k) plans; your employer has to decide to adopt them.

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