CARES Act Update: Will You Adopt These 401(k) Changes into Your Plan?

CARES Act Update: Will You Adopt These 401(k) Changes into Your Plan?

Andrew F. KnutsonBy Andy Knutson, CPA

One of the many relief measures of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was to loosen the rules surrounding 401(k) loans, withdrawals, and required minimum distributions (RMDs). If you’re an employer who offers a 401(k), you’re now faced with a decision: Should you adopt these changes into your plan documents?

You may have already made this decision if you work with a national retirement plan provider. But if you work with a smaller or specialty provider, it may be up to you to get the ball rolling. Here’s what you should consider before you amend your plan.

How has the CARES Act loosened the 401(k) rules?

The CARES Act brought about two major changes to 401(k) plans:

  • Early withdrawal (i.e., prior to age 59½) penalty for distributions up to $100,000 has been waived. The distribution is taxed, but participants have three years to pay the tax or pay back the funds into the plan.
  • Loan limit has been increased from $50,000 to $100,000.
  • 2020 RMDs have been waived (applicable to any retirement plan).

These first two changes apply only to certain individuals who have been adversely affected by COVID-19. Per the CARES Act, this is someone who has been officially diagnosed with coronavirus, or whose spouse or dependent has received a diagnosis. This could also be an individual who has experienced “adverse financial consequences” as a result of the virus, such as being quarantined, furloughed, or laid off, or having to reduce work hours or miss work to care for a child.

Any plan participant is eligible to receive RMD relief.

Won’t this tempt employees to take money out of their retirement plans?

While it may seem like a no-brainer to give your employees access to these relief measures, there are a few things to consider.

Right now, the market is depressed. If employees take funds out of their 401(k) accounts, it could prevent them from benefiting when the market bounces back, potentially hurting their future retirement dollars.

Employees should know these measures are meant to be used only as a last resort. Consider the financial sophistication of your workforce. Are you confident the benefit would outweigh the risk?

Regardless of your business type or industry, your third-party plan administrator or investment advisor should offer literature and advice to any employees who wish to consider taking advantage of these measures.

What’s best for your employees?

There are many hard decisions out there right now, and this is one of them. If you’re unsure about adopting the 401(k) changes, we can help you weigh the pros and cons. Because we’re up to date on all CARES Act and other economic relief measures, we can guide you through your options.

If you have questions about what’s available for your business, contact us today.

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