CARES Act Overview for 401(k) Plans

The CARES Act provides some temporary relief for 401(k) plan sponsors and their participants. Here's everything you need to know about provisions specific to plans.

Bandaids in shape of heart

The CARES Act, a $2 trillion economic stimulus package signed into law on March 27 after unusually speedy Congressional approval, provides some temporary relief for retirement plan sponsors and their participants. Below is a summary of provisions specific to 401(k) plans, although there are many details yet to be worked through.

Eligibility: In order to be eligible for the Coronavirus Related Distributions (CRDs) and relaxed loan provisions, participants will be required to certify that they meet one of the following criteria:

  • They have contracted COVID19 themselves
  • Their spouse or dependent has contracted COVID19
  • They have lost a job, been furloughed or otherwise suffered a heavy financial burden because of COVID19 (including loss of childcare)

CRDs and the relaxed loan provisions are optional plan features. Plan sponsors who decide to make these features available to their participants should inform their providers, who can offer guidance, additional details and assistance in communicating changes to your employees. Although plans will need to be amended to include these special features, you have until the end of 2022 to do so. Betterment for Business has been in touch with clients regarding the CARES Act and is waiving any related plan amendment fees.

Coronavirus Related Distribution (CRD)

Eligible participants (see above) can take up to $100,000 from employer-sponsored retirement plans and IRAs without being subject to the normal 10% early distribution penalty or the 20% mandatory tax withholding. In addition, although the CRD will be treated as regular income, it can be spread over three years for tax purposes, and the distribution can be repaid---without being subject to the regular contribution cap---within three years to avoid taxation. CRDs are available for the entire 2020 calendar year, so even 2020 distributions made prior to the enactment of the CARES Act may be treated as a CRD.

Relaxed Loan Provisions

The available 401(k) loan amount has been increased to the lesser of 100% of the vested balance (up from 50%) or $100,000 (up from $50,000). In addition, participants with loan repayments due between 3/27/2020 and 12/31/2020 can elect to delay them for 1 year. Interest will continue to accrue, but the term of the loan will be extended accordingly.

Required Minimum Distribution (RMD) Waiver

By law, participants turning 72 are required to start taking RMDs based on previous calendar year-end market values. (The RMD age was increased in 2020 from 70 ½.) So 2019/2020 RMDs based on 12/31/18 and 12/31/2019 market values would have forced individuals to sell investments at drastically reduced prices.

The CARES Act waives all RMDs for 2020, including first-time 2019 RMDs, which individuals may have been waiting until April 1, 2020 to make. Any RMDs already taken in 2020 (including 2019 RMDs paid in 2020) are eligible for a 60-day indirect rollover (or 3 year repayment under CRD rules)  and won’t be considered to have been taken as a distribution.

If you have more questions about COVID-19 and the CARES Act, please see our FAQs.