CARES Act and 401(k)s: Additional IRS Updates
The latest notice from the IRS expands the definition of those qualified to take advantage of CARES Act 401(k) distribution and loan relief.
IRS Notice 20-50
The IRS continues to release updates to the CARES (Coronavirus Aid, Relief, and Economic Security) Act in response to a growing number of outstanding questions. This latest notice, IRS Notice 20-50, provides further clarification and additional benefits to participants impacted by COVID-19.
As a refresher, the CARES Act was signed into law in late March and allows qualified individuals to take coronavirus-related distributions of up to $100,000 from their eligible retirement accounts (including IRAs) until December 30, 2020. These distributions are not subject to the 10% early withdrawal penalty that would typically apply to certain distributions taken prior to age 59-½. The CARES Act also relaxes normal retirement plan loan provisions and repayment terms. For loans taken between March 27, 2020, and September 22, 2020, the maximum loan amount has been increased from $50,000 to $100,000 of the vested balance. Additionally, participants are able to delay their loan repayments for up to one year if they fall between March 27, 2020, and December 31, 2020.
With Notice 20-50, the IRS has expanded the definition of “qualified individual.” Specifically, a qualified individual is now considered to be anyone who:
- Is diagnosed, or whose spouse or dependent is diagnosed with the virus;
- Experiences adverse financial consequences due to COVID-19 as a result of:
- the individual, the individual’s spouse, or a member of the individual’s household (that is someone who shares the individual’s principal residence) being quarantined, furloughed or laid off, or having work hours reduced;
- being unable to work due to lack of childcare; closing or reducing hours of a business that they OWN or operate;
- having pay or self-employment income reduced; or
- having a job offer rescinded or start date for a job delayed.
The notice also clarifies that qualified individuals can claim the tax benefit of the coronavirus-related distribution rules even if their employer did not implement these COVID-related distribution and loan rules.
In this Notice, the IRS also added a “Loan Safe Harbor” to the CARES Act, which permits plan sponsors to delay or suspend loan repayments for up to 1 year if those repayments otherwise would have been made from March 27, 2020, through December 31, 2020. Under this Safe Harbor:
- Loan repayments will resume when the suspension ends. This means that the repayments will resume as of January 2021 if the suspension goes through December 31;
- The term of the loan may be extended up to one year after the date the loan was originally due even if it will exceed 5 years; and
- The loan and the additional interest on the unpaid balance must be re-amortized as of January 1, 2021, to the new date.
401(k) regulations related to COVID-19 continue to evolve. Betterment is actively reviewing updates as they are published and encourages employers and others to refer to the notice for more information.
What’s Inside the Betterment Portfolio Strategy?
Explore the asset classes in Betterment's recommended set of portfolios. Then, take a look at the exchange-traded funds (ETFs) underlying each part of the portfolio strategy.
How to Use 2018’s Market Volatility to Your Advantage
The latter half of 2018 was a period of increased volatility. We view this as an opportunity for every investor.
Reducing Your Biggest Retirement Expense: Where You Live
You’ll probably want to retire somewhere different than where you live right now. Let’s make that part of your retirement plan.