CARES Act FAQs for Employees

More details about the special distributions and loan provisions that were made possible by the CARES Act.

CARES Act FAQs for Employees

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

A: This is a new type of distribution available to 401(k) and other retirement plans that was created in 2020 to provide relief to those financially impacted by COVID-19. CRDs enabled 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:  Who was eligible to take this distribution?

A: Individuals needed to meet one of the following criteria:

  1. Had been diagnosed with COVID-19
  2. Spouse or dependent had been diagnosed with COVID-19
  3. Had been experiencing financial hardship as a result COVID-19 including being quarantined, furloughed, laid-off, having to work reduced hours, or having lost childcare.

Q: What was the maximum amount available to be taken as a CRD?

A: Eligible individuals could take up to the lesser of 100% of their vested balance (amount owned outright) or $100,000 in aggregate across all tax-qualified defined contribution plans. This could be taken as 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 are the tax implications of the CRD?

A: Generally, any distributions taken prior to age 59½ 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 waived this withholding if you had  elected 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 59½ and have contributed to your Roth account for at least 5 years. If you do not meet these criteria, the distribution is considered “unqualified,” and the earnings portion of the Roth 401(k) is subject to taxation.

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: Here are two resources you may find useful:

If you took a CRD and would like to repay it, you have the option to make an indirect rollover to an Individual Retirement Account (IRA)—at Betterment or elsewhere. (Note that Betterment does not accept indirect rollovers into 401(k) plans. However, if you make an indirect rollover to an IRA first, you can then rollover the funds to your 401(k) account if you wish.)

To proceed with an indirect rollover at Betterment:

  1. Deposit the funds in a personal bank account linked to Betterment
  2. If you do not have an IRA with Betterment, you can start by creating an IRA account here.
  3. Log into your Betterment account and indicate the amount you’d like to rollover repay to a Betterment IRA via Deposit > Traditional IRA/Roth IRA > Indirect IRA Rollover. (Note: although Betterment only permits one indirect rollover per year, you have until 12/31/2023 to repay your CRD in full, so you need not pay the entire amount at once).

You are responsible for documenting the CRD and its repayment when you file your taxes. If you decide to make an indirect rollover to an IRA, you will need to note this rollover of your employer-sponsored plan on Form 1040.

If you took the CRD from a 401(k) with Betterment, we will provide you with a 1099-R.

If you decide to complete an indirect rollover to a Betterment IRA, we will also provide a Form 5498 documenting the indirect rollover into the IRA. These two forms can be used as documentation that you took a CRD and made a repayment to an eligible retirement account.

We will continue this practice while we wait on guidance from the IRS as it relates to whether individuals should also make this note with respect to CRDs.

Q: Are CRDs eligible for rollover?

A: No, CRDs were not able to be rolled 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: 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.  Relaxed loan provisions that your plan may have adopted as part of the CARES Act expired in September 2020.

Q: What was the maximum loan amount I could take under the relaxed loan provisions of the CARES Act?

A: The 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 that were due between March 27, 2020 and December 31, 2020 could have elected to delay them for one year. Interest (that you effectively pay back to yourself) continued to accrue and the term of the loan will be adjusted accordingly.

Q: Was a different interest rate applied to my loan if I delayed my repayments for a year?

A: The same interest rate continued to apply to any delayed repayments, but interest continued 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 was able to be extended for up to one year.

Q: How long were CRDs and relaxed loans available for?

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

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

This article is being provided solely for marketing and educational purposes. It does not address the details of your personal situation and is not intended to be an individualized recommendation that you take any particular action, including rolling over an existing account. When deciding whether to roll over a retirement account, you should carefully consider your personal situation and preferences. Specific factors that may be relevant to you include: available investment options, fees and expenses, services, withdrawal penalties, protections from creditors and legal judgments, required minimum distributions, and treatment of employer stock. Before deciding to roll over, you should research the details of your current retirement account, consult tax and other advisors with any questions about your personal situation, and review our Form CRS relationship summary and other disclosures.

If you currently participate in a 401(k) plan administered or advised by Betterment (or its affiliate), please understand that you are receiving this email solicitation as part of a general offering and that neither Betterment nor any of its affiliates are acting as a fiduciary, or providing investment advice or recommendations, with respect to your decision to roll over assets in your 401(k) account or any other retirement account.