New law allows new 401(k) distributions and loans

Mar. 31--I understand the new CARES Act allows new 401(k) distributions and increased 401(k) loans?

That is correct. On Friday afternoon, President Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act. In addition to the numerous financial incentives provided to individuals and businesses, the CARES Act allows certain qualified retirement plan participants, including 401(k) plan participants, to take new distributions and plan loans from their plan accounts.

What new distributions does the CARES Act allow?

The CARES Act allows certain 401(k) plan participants to take a coronavirus-related distribution from their retirement plan account up to $100,000. These distributions have significant tax advantages that do not currently exist including: the normal 20% federal income tax withholding can be ignored; these distributions are exempt from the 10% early withdrawal penalty (that typically applies if a participant is under age 59 1/2 ); the distribution can be repaid to the plan within three years; and the individual can recognize personal income for the related taxes over a three-year period that begins when they take the distribution (as opposed to having all of the amount included immediately in their income).

Who qualifies for these new distributions?

Qualifying plan participants include participants (or their spouses or dependents) who (1) have been diagnosed with the virus SARS-Co-V-2 or with coronavirus disease 2019 (COVID-19); or (2) experience adverse financial consequences as a result of being quarantined, furloughed or laid off, having work hours reduced due to such virus or disease, being unable to work due to lack of child care as a result of the virus or disease, the closing or reduction of hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Treasury Secretary.

The law also allows increased 401(k) loans?

Yes, that is correct. The Act also allows qualifying 401(k) plan participants to borrow a higher amount than what is normally allowed. For the next 180 days, the same qualifying individuals identified above (who are eligible for the new distributions) are generally eligible to borrow up to the lesser of: $100,000 (which is double the normal limit); or 100% of their vested account balance (double the normal limit). The act also allows more flexibility for repayment of these loans. Generally, participants can be allowed to delay repayment by up to one year.

Finally, the law also allows 401(k) participants to delay received required distributions (RMDs) in 2020, correct?

Yes. Under current law, individuals who reach age 70 1/2 prior to 2020 or 72 in 2020 (or a later year) must begin to receive "required minimum distributions" (RMDs) from the plan. The CARES Act allows plans to suspend the RMD payments otherwise required to be made in calendar year 2020. The waiver applies to certain qualified retirement plans, including 401(k) plans.

Paula Burkes, Business writer

___

(c)2020 The Oklahoman

Visit The Oklahoman at www.newsok.com

Distributed by Tribune Content Agency, LLC.