The Coronavirus Aid, Relief, and Economic Security Act (“CARES”) that was signed into law by President Trump on March 27, 2020 also includes provisions to allow exceptions for 401k distributions. Distributions that don’t exceed $100,000 won’t be subject to a 10% early distribution penalty under Code Section 72(t). The early distribution penalty won’t attach to any distribution from a qualified plan that is made on or after January 1, 2020, and before December 31, 2020, to an individual participant who is one of the following:
- An individual who is diagnosed with COVID-19 or SARS-CoV-2;
- An individual whose spouse or dependent is diagnosed with COVID-19 or SARS-CoV-2; or
- An individual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, experiencing a reduction of work hours, inability to work due to lack of child care caused by COVID-19 or SARS-CoV-2, the closing or reduction of hours by a business owned or operated by such participant due to COVID-19 or SARS-CoV-2, or other factors determined by the Treasury Secretary.
There is no documentation required by the participant to be eligible for the distribution. The plan administrator will need to rely on the affected participant’s certification that they fall under this exception to the early distribution penalty. The tax on the distribution can be spread pro-rata over three years. The individual has an opportunity to repay the coronavirus distribution to the plan over the next three-year period which would begin on the date following the distribution.
The CARES Act also expands access to plan loans. The maximum loan that can be taken is increased to the lesser of $100,000 or 100% of an individual’s vested account balance. This Coronavirus related limit is double the current limit under the law (which is the lesser of $50,000 or 50% of an individual’s vested account balance.)
In addition, affected individuals with outstanding loan balances on or after the date of enactment of the CARES ACT may be allowed to delay loan repayments for up to one year regardless of the five-year repayment period. Therefore, future payments will be adjusted to reflect interest accrued for the period of delay and the term of the length of the loan will be extended.
Finally, minimum distributions have been waived. The required minimum distribution requirements are waived for distributions that should have been made in 2020 for a required distribution date that occurs in 2020.