The CARES Act Provides Additional Relief Through 401k Plans

16 Journal Lady

Please visit our COVID-19 resources page with more information for business owners and employees.

The CARES Act provides some relief to people affected by COVID-19 through their 401k plans. The new bill increases retirement plan loans and eliminates the penalty for early withdrawals to certain eligible participants. 

All of the retirement relief provisions under the act are optional for plan sponsors to add. These options are available under the Nextep retirement plan. If you don’t have a Nextep 401k, you may contact your provider for guidance.

Penalty-free withdrawals

Generally, withdrawals from your retirement account before age 59 ½ result in a 10 percent penalty. The CARES Act eliminates the penalty and allows individuals, regardless of age, to withdraw up to $100,000 in 2020 for coronavirus-related reasons.

To be eligible for the penalty-free withdrawal, an individual, their spouse, or their dependent must be diagnosed with COVID-19 or suffer financial hardship (e.g. a reduction in work hours, unexpected leave without pay, loss of business) due to the outbreak.

Those who take the COVID-19 distribution have two options. They can treat it like an interest-free loan and repay the amount within three years from the date of distribution. With this repayment option, there are no tax penalties. 

The second option is to treat the 401(k) distribution like an early withdrawal that won’t be paid back. Normally, there would be a 10 percent tax penalty for early withdrawals from a retirement account, but those who use this option under the CARES Act provision will owe ordinary income tax on the amount they take from their account, instead. The taxes can be paid over three years, or avoided altogether by going with the first option and replacing the withdrawn funds within the three year period.

Retirement plan loans & repayment

Participants who meet the coronavirus-related criteria may also be eligible to take out a retirement plan loan with a new loan limit. The CARES Act temporarily raises the limit on retirement account loans to the lesser of $100,000 or 100 percent of the participant’s vested account balance. If you already have a retirement loan, the act doesn’t allow you to take an additional loan, but you may be able to refinance. 

With a retirement plan loan, unlike early withdrawals under the CARES Act, there is interest. However, the loan amount and interest are repaid to your retirement account. Interest rates are usually lower than a bank or lender loan.

If an individual doesn’t repay the loan on time, the amount borrowed is taxed as early distribution, and if you’re younger than 59 ½, you’ll also pay the 10 percent penalty for early withdrawal.

Participants with outstanding loan payments who meet the COVID-19 eligibility criteria can delay loan payments due from March 27 to December 31, 2020 up to a year. Interest continues to accrue during that time, and the plan can extend the term of the loan for up to one year. 

Required Minimum Distributions (RMD)

The CARES Act waives required minimum distributions (RMDs) from retirement savings accounts for 2020. This means if you’re 70 ½ or older (born after June 30, 1949) in 2020, you can skip this year’s RMD to allow for account balances to recover. For more info about recent retirement legislation, check out our SECURE Act blog.

If a required minimum distribution has already been received during 2020, the participant may roll it over and defer paying taxes, including rolling the funds back into their plan. It is expected that the IRS will extend the 60-day rollover period. 

If you have any questions about your 401k plan with Nextep, contact the retirement team at 401k@nextep.com

Disclaimer: 

This article is not financial advice. Before taking advantage of the CARES Act retirement plan provisions, consult a financial professional.

Resources:

MassMutual CARES Act retirement guide

Nextep COVID-19 resources

Blog: What the Cares Act Means for Workers  

Blog: How the CARES Act Can Help Small Businesses

Also on Nextep

Ah, the holiday season—a time for joy, festivities, and the age-old puzzle of compensating your employees. Let’s demystify the rules of holiday pay for both our hourly (nonexempt) and salaried (exempt) workers. For the Hourly Heroes Picture your business decked out in holiday cheer, but your nonexempt employees are sipping cocoa at home. Under the […]
Read more
Keep Your Party Pants Professional As the year ends, and you’ve achieved feats at work that deserve a standing ovation, the holiday office party is your well-earned, much-awaited reward.  But beware! When the festive spirit meets the allure of a bottomless drink supply, things can take a wild turn, leaving you nursing a hangover, regret, […]
Read more
We’ve talked recently about the importance of sustainability in business. Let’s take it a step further and look at ESG, or Environmental, Social, and Governance.  The Impact of ESG on Companies Environmental (E) Companies that focus on their environmental impact are making a positive change. They reduce their carbon footprint, use clean energy, and find […]
Read more
Sustainable business isn’t just for hippies! As we discussed in our previous article, sustainability is increasingly important to today’s business. It is a crucial and relevant issue that affects everyone and every organization, regardless of industry or beliefs. Sustainability involves taking a long-term, holistic view of how we interact with the environment and our communities, […]
Read more
At Nextep, we aim to stay informed about CEO concerns in order to better help with problem-solving. We were surprised to learn that sustainability has become a top concern. The statistics bring CEO concerns to light: A Gartner survey found that CEO concern about sustainability has increased 292% from their 2021-22 survey. In a survey […]
Read more
It’s not the most savory of topics, but still merits discussion. All of your employees will need to use the bathroom during work. Here’s a potty primer, if you will. Disability and Bathrooms The Americans with Disabilities Act (ADA) has clear regulations on bathroom accessibility in the workplace. Much of the guidance revolves around making […]
Read more
We’ve reported at length about preventing discrimination in the workplace. But let’s take a step back now and brush up on Title VII, the sweeping regulation that started it all.  Title VII of the Civil Rights Act forbids discrimination in any aspect of employment, including hiring, firing, pay, job assignments, promotions, layoff, training, fringe benefits, […]
Read more
Time to check your handbook again for NLRB compliance The National Labor Relations Board (NLRB) has been busy shaping employee handbooks and workplace policies. With the recent Stericycle Inc. decision, the NLRB has introduced a new legal standard for evaluating employer work rules under Section 8(a)(1) of the National Labor Relations Act (NLRA).  Understanding the […]
Read more
The Answer Depends on Your State…For Now As we reported in January, non-compete agreements preventing employees from working for competitors are becoming increasingly unenforceable. The FTC is currently working on banning them at a federal level, but unless and until that decision comes, non-competes are enforced at a state (and sometimes even local) level.  As […]
Read more
When hiring workers, knowing whether they’re employees or independent contractors is essential. The difference between the two can significantly impact your business, including your tax liability, your liability for workers’ compensation claims, the worker’s rights and benefits, and your ability to control how your workers do their jobs. Read all about it here, and check […]
Read more
Employers Must Now Prove “Substantial Increased Cost” to Deny Religious Accommodation Recently, the Supreme Court ruled that employers must now demonstrate a substantially increased cost to deny an employee’s request for a religious accommodation.  This ruling, which comes in the case of Groff v. DeJoy, clarifies the standard for “undue hardship” under Title VII of […]
Read more
Here’s How the Recent Ruling Affects Your Company You may have read that in late June, the Supreme Court struck down affirmative action in college admissions. Here’s the implication this ruling could mean for you as a small or medium-sized business owner. To be clear, the Supreme Court’s decision on affirmative action does not explicitly […]
Read more

Download Our App