The CARES Act and the Solo 401k
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted on March 27, 2020 to provide short-term financial relief to those who have experienced adverse financial consequences from the current pandemic. The CARES Act includes expanded provisions for Coronavirus-related distributions and participant loans.
Solo 401k owners can utilize these expanded provisions under the CARES Act if they qualify. Pursuant to section 2202(a)(4)(A)(ii) of the CARES Act, a qualified individual for purposes of this notice is an individual:
- who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (referred to collectively in this notice as COVID-19) by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act);
- whose spouse or dependent (as defined in section 152 of the 5 Code) is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act; or
- who experiences adverse financial consequences as a result of:
- the individual being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19;
- the individual being unable to work due to lack of childcare due to COVID-19; or
- closing or reducing hours of a business owned or operated by the individual due to COVID-19.
In addition, pursuant to the authority of the Secretary to issue guidance to provide for other factors under section 2202(a)(4)(A)(ii)(III) of the CARES Act, a qualified individual for purposes of Notice 2020-50 is an individual who experiences adverse financial consequences as a result of:
- the individual having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19;
- the individual’s spouse or a member of the individual’s household (as defined below) being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; or
- closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.
For purposes of applying these additional factors, a member of the individual’s household is someone who shares the individual’s principal residence.
If a Solo 401k owner meets one of the qualifications above, he/she may rely on self-certification. A self-certification form must be completed by the Solo 401k owner and then kept in his/her file as Plan Administrator of the Solo 401k.
Coronavirus-related distribution provisions
- Up to $100,000 can be taken as a distribution from the plan (if the employer is a member of a controlled group, the $100,000 maximum applies to the aggregated limit over all plans maintained by the controlled group)
- 10% early withdrawal penalty is waived
- Normal taxation applies on a distribution of traditional/pre-tax funds
- Payment of tax on distribution can take place over 3 years, starting with the 2020 tax filing
- Repayment of entire distribution can be done over 3 years starting with the day after the distribution is received. Repayment can occur through multiple payments or one lump sum payment by the end of those 3 years. If entire distribution is paid back within that time, the distribution will not be taxed.
- Applies to qualifying distributions taken from January 1 through December 31, 2020
Coronavirus-related loan provisions
The loan provisions of the CARES Act apply to determining the maximum loan amount and delaying the repayment of new and existing participant loans from the Solo 401k.
- Determining the maximum participant loan amount
- Applies to a new loan taken between March 27 – September 22, 2020
- Up to $100,000 or 100% of the participant’s vested account balance, whichever is less, can be taken as a new participant loan
- Delaying the repayment of new and existing participant loans
- Applies to loan repayments on new or existing participant loans
- Loan repayments that are due between March 27- December 31, 2020 may be delayed up to 1 year
- Loan payments will resume with any payments due on or after January 1, 2021
- Interest continues to accrue within the repayment period
- Loan repayments must still occur in level payments; no lump sum repayment can occur at the end of the loan repayment period
- Skipped payments (plus interest on those skipped payments) must be repaid starting on the 1-year anniversary of the first skipped payment
- The maximum repayment period will be extended by the time frame in which payments were skipped, e.g. up to 1 year
Action items for Solo 401k owners
- Determine if you are a qualified individual under the CARES Act
- If you qualify, complete a self-certification form and keep it in your file
- If you are a member of a controlled group, track aggregate amounts of your Coronavirus-related distributions so as not to exceed the maximum
- If you take a Coronavirus-related participant loan, document and track any delayed repayments to the loan
- If you take a Coronavirus-related distribution, determine and track repayments, if applicable
Sense Financial will continue to update this page as additional guidance from the IRS and the DOL is expected in the future.