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 The taxes can be paid over three years, or avoided altogether by going with the first option and replacing the withdrawn funds within the three year period.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

An Employer’s Guide to Politics in the Workplace The current political climate can be divisive, and tension can easily spill over into the workplace. When employees hold vastly different political views, it can lead to arguments, hurt feelings, and a fractured work environment. So, what’s an employer’s responsibility when it comes to politics in the […]
Read more
Unpacking the Buzzword You’ve likely heard the term “quiet quitting,” conjuring images of disengaged workers coasting through their jobs. But before we jump on the bandwagon of criticism, let’s take a closer look at what this phenomenon actually means. At its core, quiet quitting describes employees fulfilling their job requirements without going the extra mile. […]
Read more
A No-Nonsense Guide for Business Leaders The work landscape is shifting, and your business might be left behind if you’re still operating with a traditional mindset. Deloitte’s 2023 Global Human Capital Trends report offers valuable insights for navigating this changing terrain. Here are the key takeaways you need to know about the future of your […]
Read more
In today’s evolving work environment, employee engagement and productivity have become critical priorities for businesses. McKinsey’s research sheds light on this topic by identifying six distinct employee personas, each exhibiting varying levels of satisfaction, engagement, and performance. But the most striking revelation? Over half the workforce falls into two stark categories: building value or destroying […]
Read more
How to handle insurance during leave of absence Employee leaves of absence from work raise questions, especially about health benefits. Who shoulders the insurance premiums during the leave? Let’s untangle this knot one thread at a time. Paid Leave: Business as Usual Paid leaves are straightforward. Simply maintain regular benefit deductions from their paychecks as […]
Read more
March 1, 2024 is Employee Appreciation Day! Every year, businesses across the globe take a moment to pause and honor the backbone of their success: their employees. Employee Appreciation Day, usually celebrated on the first Friday of March, is a chance to express sincere gratitude and show these hardworking individuals how much they mean.  Appreciating […]
Read more
Remember that new independent contractor rule coming soon? It’s the one that makes it harder for businesses to call a worker a “contractor.” As a reminder, that big change kicks in March 11, 2024. Why should you care? More workers might become employees. This means benefits like minimum wage, health insurance eligibility, paid time off, […]
Read more
What Businesses Need to Know Last week, we discussed collaborating with employees who request religious accommodations during Ramadan. This week, we’ll look at some of the nuts and bolts of religious accommodations at work and the impact of last year’s Supreme Court case, Groff v. DeJoy. The Groff v. DeJoy decision, as we covered when […]
Read more
Ramadan, the holy month of fasting and reflection for Muslims, begins on Sunday, March 10, 2024, and end on Tuesday, April 9. As an employer, understanding your Muslim employees’ needs during this time fosters a supportive and inclusive workplace.  It’s important to consider that rejecting flexible requests without a valid reason could be seen as […]
Read more
Big Change for Gig Work and More The Department of Labor (DOL) has revised its rules for classifying workers as independent contractors, making it more difficult for businesses to do so.  Effective March 11, 2024, this change impacts workers across the US and could have significant implications for businesses of all sizes. New rules make […]
Read more
Essential Updates for Employers in the New Year Heads up, employers: there are several new workplace laws and regulations in 2024.  The new year is just around the corner, bringing a wave of changes for employers nationwide. These regulations aim to create a fair and supportive work environment that attracts and retains top talent. Federal […]
Read more
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

Download Our App


Download the Nextep Mobile App in Apple iOS or Google Play