How the CARES Act Affects 401(k) Plans

The concept of overburdened medical expenses

The Coronavirus, Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27th, 2020. Our Retirement Services Relief Guide breakdowns how the CARES Act impacts retirement plans and your participants.

The following relief guidelines outlines what distribution and withdrawal benefit options are available for 401(k) plans.

The Corona-Virus Related Distribution Option (CRD)

The CARES Act provides participants the option to take a Corona-Virus Related Distribution Option (CRD) of up to $100,000 from a retirement plan between January 1, 2020 and December 31, 2020.

To qualify for a CRD, individuals must meet one of the following requirements:

  • The individual, spouse, or dependent has been diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the CDC;
  • The individual has experienced adverse financial consequences caused by:
    • Being quarantined, furloughed, laid off, or having hours reduced due to such virus or disease;
    • Being unable to work because of lack of child-care due to such virus or disease;
    • The closing or reducing hours of a business owned or operated by the individual due to such virus or disease; or
    • Other factors determined by the Secretary of the Treasury.

CRD Withdrawal Benefits

CRD’s are more favorable than other traditional 401(k) withdrawal options:

  • The 10% early withdrawal penalty is waived for any CRD up to $100,000 for any year
  • The amount included in gross income from a CRD can be spread ratably over a three-year period beginning in the year of the distribution
  • Despite being a distributable event, a CRD can be repaid to an eligible retirement plan within three years in the same manner as a rollover. These repayments are not subject to retirement plan contribution limits.
  • Traditional hardship withdrawals can be distributed from limited contribution sources whereas all contribution sources (except money purchase pension plan) are available for a CRD

Loans and Required Minimum Distributions Relief

Individuals eligible for a CRD, may take a loan of 100% of their account up to $100,000 for loans made from March 27, 2020 through September 23, 2020

  • Loan repayments from January 1, 2020 through December 31, 2020 can be delayed for one year and the five year-repayment period will disregard 2020 delayed period

Required minimum distributions (“RMDs”) on pre-tax contributions for individuals age 72+ are not required for calendar year 2020. 

  • RMDs taken in 2020 are eligible for rollover.

The CRD, Loans and RMD changes take effect as of January 1, 2020. Conforming plan amendments are not required until the last day of the first plan year beginning on or after January 1, 2022 (or a later date as set by the Secretary of the Treasury).

ABD Retirement Services, Member FINRA/SIPC. ABD Retirement Services is a registered investment advisor. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the Firm by the Commission. ABD Retirement Services does not provide legal, accounting or tax advice. 

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