>>> UPDATED: THE CARES ACT HAS PASSED – Click here to read more about how the CARES Act affects your Solo 401k plan <<<
It’s certainly a good time to have full control of your retirement account. And although the news flashes are all about the Wall Street meltdown, the soon to be released CARES Act legislation will impact self directed retirement accounts and specifically Solo 401ks. The GOOD NEWS is that you will have more flexibility to protect and preserve your retirement funds and assets.
What to Expect from CARES Act
Legislation is still in progress. A few key emerging changes are:
- Waives the 10% penalty for early withdraw and allow taxpayers to later restore any withdrawn funds.
- Waive required minimum distribution rules for retirement accounts. The effect is not forcing retirees to sell retirement assets during the downtown at abnormally low values.
- Increases Solo 401k loan caps from $50,000 up to $100,000.
- Furloughed and leave-of-absent employees might be able to have 401k loan payments suspended. (Different rules may apply to leave of absence due to qualified military service.)
- Suspended loan payments will probably be deferred up to a year, which could extend the 5-year loan repayment period to 6-years.
- Delay repaying existing 401k loans.
- Unemployment benefits are expected to be extended to self-employed workers. Unemployment benefits are also expected to extend an additional 13 weeks through December 31, 2020.
- Businesses with 100 or fewer employees (one employee) receive a 50% refundable payroll tax credit on wages up to $10,000 during the crisis (includes health insurance costs).
- Provisions for your small business in accordance with qualifying for a Solo 401k retirement account.
CARES Act – Retirement Account Impacts
This may be the most massive financial package ever passed by congress. It’s certainly going to take time to fully understand and there may be amendments made before it becomes law. Changes may also be made after it has passed and as it rolls out. Certainly, full implications won’t be known until IRS guidelines begin coming out.
Still, there are elements of the CARES Act that will impact you, your retirement account, and your business.
Withdrawals up to $100,000 can be made penalty-free but there are likely to be conditions attached. Notably, the withdrawal must be repaid within three years (currently, the consequences of not repaying the loan is unknown).
To qualify, you must meet one of two requirements.
- You, your spouse, or a dependent are diagnosed with coronavirus.
- You experience financial hardship that can result from many different economic realities including reduced work hours, quarantined, laid-off, furloughed, or unable to work because of lack of childcare caused by coronavirus. Something important to consider here is early withdrawal might result in selling assets at distressed values.
401k Participant Loans
The cap is being raised from $50,000 to $100,000. This can be up to 100% of the vested account balance. This also applies to accounts that didn’t previously allow loans (rules can be adopted immediately). Already existing loans with a due date before Dec. 31, 2020, can delay repaying the loan for an additional year. You won’t owe income tax on these loans but they will be paid back with after-tax dollars.
CARES Act and Retirement Account – No Required Minimum Distributions in 2020
Timing is important because normally you have to take your first required minimum distribution by April 1 of the year you turn 70½. The Secure Act already raised the age of required distribution to age 72 for individuals turning 70½ on or after January 1, 2020. It’s important to understand how this applies because the IRS penalty may be severe — 50% of the amount not taken on time. A reason to consider not taking a minimum distribution is that the minimum is calculated on account balances as of the end of 2019.
Unemployment Benefits for Self-Employed
Section 2102 of the legislation (as written but not yet enacted) makes it clear that up to 39 weeks of unemployment insurance (UI) will be available to people who would otherwise not qualify. Specifically, this includes the self-employed, independent contractors, and those who have exhausted their regular and extended benefits. The benefit amount is the same as normally available under state law or a minimum of 50% of the average weekly payment of regular compensation in the state. In addition, it appears the emergency increase of an additional $600 per week will apply through July 31, 2020. Something that looks like it will need further clarification is the requirement to seek employment during these times of quarantine and stay at home proclamations.
Updates Still Coming
There are state requirements included in the CARES act that include the state must sign up for it by July 31, 2020. To receive the $600 emergency increase in benefits, the state must not decrease its portion of benefits. The federal government will also fully pay the first week of benefits for states that waive the first-week waiting requirement. The UI provisions for the self-employed runs from January 27, 2020, through December 31, 2020. Also, because the president has declared a national emergency, people directly impacted may be eligible for unemployment benefits as defined in the Disaster Unemployment Assistance program (aka Stafford Act).
This program includes people who were scheduled to begin work but are unable to start because of the disaster. There are also benefits available under the Short-Time Compensation act (STC) for people with reduced hours so they receive pro-rated payments (only about half of all states have STC). It’s estimated there are about 15.6 million self-employed and alternative workers that otherwise would not qualify without these changes to unemployment laws.
Tax Provisions for Small Businesses
The CARES Act will also affect retirement accounts for small business owners. Among the largest tax changes that impact the self-employed is the delayed payment of the employer portion of social security taxes. Currently, the rate is 6.2% of wages. The delayed payment is good for the remainder of 2020 and the payback period will be over the next two years.
Many of the other provisions are intended to retain employees and aren’t likely to affect businesses that only employ the owner of a Solo 401k. But there is one temporary tax relief involving limitations on net operating losses that you may want to understand. As currently written it allows carry-back of net operating losses from 2018, 2019, and 2020. The carry-back can be applied for the past five years. A loss in 2020 could be applied as far back as 2015. For previous years, an amended tax return is likely required. This applies to pass-through entities.
Loans for Small Businesses
Besides tax changes, there are several other provisions for small business that will soon be available. Many will come through the Small Business Administration (SBA). The largest amount of funds will be in the form of low-interest loans that are spread out over long periods of time to make repayment easy. Businesses with other credit available may not be eligible for SBA loans. Terms will be on a case-by-case basis with interest rates beginning at 3.75%. For any loan made under this program before December 31, 2020, no personal guarantee will be required on loans below $200,000. The SBA is also currently rewriting criteria for previous loans that are based on disaster relief. Payments are expected to be deferred until Dec. 31, 2020. The deferred payments are expected to be automatic and not require a case-by-case review.
This all comes on the heels of an extended tax filing deadline. Therefore, don’t rush to file your 2019 taxes. A lot is going on and almost certainly more changes are coming. But there is cause for optimism and further talk of a 4th and 5th relief package is already happening. This is a very good time to have full control of your retirement account.
Have questions about how the CARES Act will affect your retirement account? The 401k experts at Nabers Group will help you get your retirement funds into your control, where they belong.
would like info on SBA business loan
Absolutely, click here to learn more about small business loans during the COVID-19 crisis: https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources
can you withdraw from a roth 401k without penalty during these times?
Hi Daryl, from the guidance we have now – the same rules apply as far as qualified Roth distributions. You can remove your contributions tax-free. However, the growth/profit on those contribution may be taxable if the funds haven’t been in your plan for 5 years and you are also age 59.5 (both factors must be in place for funds to be qualified). Otherwise, it would be a taxable distribution unless it is a Coronavirus-related distribution.
SO – if you qualify for the Coronavirus distribution (more on that here), then you could remove the Roth funds (even the growth/earnings) and pay taxes over 3 years or put the money back within 3 years.
I am self employed. I created a solo 401k in December. I have not yet made a contribution…still figuring the best $ amount. I gave all my info to my accountant in February, and we made a plan to meet as he put together my return, to decide the appropriate contribution amount for the situation.
With the subsequent COVID-19 extension, my tax return has not progressed–and I am not having success reaching the accountant with this one question: Has the contribution deadline changed along with the filing deadline? Or do I need to file an extension, any way in order to have more time to contribute?
Hi Brenda, great questions and happy to help. With the tax extension, you will have until July 15th to make your contribution to the Solo 401k as well. However, we’d recommend you consider filing an extension so you have until at least October 15th to make the contribution. Remember, IRS Publication 560 allows you to take until extension deadline (if filed) to make your contributions. Now more than ever – take that extra time since the government is giving it to you!