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 The taxes can be paid over three years, or avoided altogether by going with the first option and replacing the withdrawn funds within the three year period.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

Get the low down on how to handle pay correctly. Should you pay your employees for working during lunch? Yes.  Easy answer! Right? Well, no. Though the simple answer is an emphatic yes, it’s a bit more nuanced.  The topic of lunch and compensable time can be tricky. There are many ways an employee could […]
Read more
An employee’s first day at a new job can set the tone for the working relationship going forward. In fact, according to research by Brandon Hall Group, organizations with a strong onboarding process can improve new hire retention by 82% and productivity by more than 70%. Though the employee may feel stressed or nervous, the […]
Read more
Your company policies and values are only as good as the leaders implementing them. Get your leadership team on board, make sure they’re living out your company values, and support them to ensure they get the help they need to lead well. “Half of workers who quit their jobs say they left because of their […]
Read more
…And what you should ask instead Say you’re recruiting top talent for your company and find a few excellent candidates. When it’s time for the job interview, you smile, shake hands (or wave hello over Zoom), and sit down for a productive conversation. Your first question is a softball to help warm them up: “Have […]
Read more
How often do you get the chance to expand beyond your current retention or recruiting strategies? It’s common for managers to get stuck in the daily work routine and overlook the growth opportunities their employees want. That neglect may mean a greater chance of talented employees leaving in the short run. Around 48% of employees […]
Read more
Could your employee handbook stand up to a lawsuit or EEOC claim? Here are six tricky areas that could mean trouble for your company. Landmine 1: A handbook that’s older than dirt When was the last time you reviewed your company’s employee handbook? If it’s been longer than a year, then it’s been too long.  […]
Read more
We all know the importance of regular physicals and check-ups, but when was the last time you checked in on your mental health? May is Mental Health Awareness month, serving as a good reminder of how crucial a healthy mind is in the overall map of our wellbeing. This list and infographic can get you […]
Read more
If you’ve made it to this blog on leadership training, chances are you’ve spent some time with us the last couple of months as we dove into turning The Great Resignation into The Great Retention.  So far, we’ve covered flexibility, DEI, employee growth, pay, employee engagement, and benefits. While each of these is important, when […]
Read more
It’s no surprise benefits are one of the top reasons for employees staying with a company or going elsewhere. The Society for Human Resource Management (SHRM) study shows that 36% of employees leave for better benefits. Employee retention can be daunting, but we’re here to break it down! Therefore, we’re talking today about benefits. We’ll look […]
Read more
Employee engagement is a crucial piece of the recruiting and retaining top talent puzzle. When it comes to employee engagement, few people in Nextep can speak more authoritatively on the subject than our very own Director of Happiness, Tracey Hixon. To help you get started, Tracey answers some questions about how to retain employees by […]
Read more
In our employee retention series, we’ve talked about flexibility, employee growth, and diversity, equity, and inclusion (DEI). Now, let’s look at another topic that has a massive impact on attracting and retaining top talent: pay! The Great Resignation and the impacts of an ongoing pandemic have long-lasting effects. As a result, employees are evaluating their […]
Read more
Now is the time for employers to carefully review any arbitration or employment agreements they have in place. On March 3, 2022, President Biden signed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (HR 4445).  In cases of sexual assault or harassment in the workplace, many employers ask employees to sign arbitration […]
Read more

Download Our App