CARES Act allows new flexibility in 401(k)s for emergency cash needs
Joe DiDomenico | Director, Retirement Services
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 28, 2020. Created as a way to help people in need of cash, it provides relief by allowing those participating in employer-sponsored 401(k) plans to borrow from those plans. Here we take a closer look at some of the changes coming into play to help people during these tough times.
What has changed?
Prior to the extenuating circumstances created by the outbreak of the coronavirus, the maximum amount that could be borrowed from a 401(k) was $50,000, or 50% of the plan balance, whichever was lower. The new rules will allow those in need of cash to borrow up to $100,000 from their plan, or up to 100% of the plan balance, whichever is lower.
Those who remove the required funds from their 401(k)s will have a 5-year maximum amortized schedule to repay the loan back to their plan. This requires a minimum quarterly payment.
Additionally, 401(k) plan administrators will also need to amend their plans to accommodate the new law, but they are not required to do so. 401(k) holders who intend to withdraw from their plan should ask their plan administrator if the loan maximums are allowed for their plan.
What if I have a Solo 401(k)?
For those who hold a Solo 401(k), which is typically business owners who do not have employees other than their family, it’s simple to amend the plan document. Simply reference the section of the plan document that talks about loans, and write a brief amendment stating the new rules. Sign it, if you are the plan trustee or administrator, and save it in your files with your other Solo 401(k) documents. For those who have someone else managing their Solo 401(k) plan, ask them to make this change.
What is the difference between a 401(k) loan and a hardship distribution?
The 401(k) loan is not a hardship distribution, it is a loan. The difference between a hardship distribution and a loan is that a distribution is a taxable event, whereas a loan is not, as long as minimum loan repayments are made. The increase in hardship distribution has also been increased to $100,000 from now until December 31, 2020, but only for the following:
- People who are diagnosed with COVID-19
- People who have experienced financial hardship from quarantine, layoffs, reduced hours, or are furloughed
Who does not qualify for hardship withdrawals?
Those who have other assets that they could draw on to meet the need or have insurance that will cover the need will not qualify for a hardship withdrawal.
It’s important to keep in mind that it might be likely that securities in the 401(k) plan may need to be sold, possibly at a market low point, in order to generate the cash for the loan. While this may not be optimal, it may be the case that the funds are needed badly enough that this becomes necessary.
In times of economic crisis, being aware of regulatory changes that help your financial decision-making is critical. We hope that those who need to draw from their 401(k) plan in these circumstances are able to find relief through the changes set in motion by the CARES Act.
Please note, Yieldstreet does not provide tax or accounting advice, so please consult with your tax or accounting professional for advice specific to your situation.
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