With the current Coronavirus crisis, we have received numerous questions about how to administer your Solo 401k plan. The situation is constantly evolving and we are in close communication with our contacts at the IRS, DOL and SBA. That said, we want to provide answers to common questions based on the information we currently have.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the CARES Act) was signed into law. The law is one of the largest stimulus packages in our nation’s history and includes multiple provisions that affect the Solo 401k.
One goal of the CARES Act is to give those affected by the current pandemic access to your retirement funds while minimizing tax consequences and maximizing the ability to return your funds to the Solo 401k where allowed.
We are still waiting on the IRS and DOL to issue guidance related to some provisions but will share what we know so far.
Coronavirus-Related Distributions
Q1. What is a Coronavirus-Related Distribution (CVRD)?
A1. A CVRD is a withdrawal/distribution made by a “CVRD Qualified Participant” (after January 1, 2020 and before December 31, 2020).
Q2. Does the Solo 401k need to be rewritten to allow for a Coronavirus-Related Distribution (CVRD)?
A2. No.
Q3. Who can take a Coronavirus-Related Distribution?
A3. You must meet one the following three requirements to qualify:
- Have been diagnosed with the virus SARS-CoV-2 or the disease COVID-19 by a test approved by the CDC.
- Have a spouse spouse or dependent diagnosed with COVID-19.
- Experienced financial hardship as a result of being:
- Quarantined
- Furloughed
- Laid off
- Reduced work hours due to COVID-19
- Unable to work due to lack of child care due to COVID-19
- Closed or reduced hours of the business the participant owns or operates due to COVID-19
Coronavirus and the Solo 401k
Q4. What kind of documentation does the Solo 401k need to determine someone is a CVRD Qualified Participant?
A4. The plan administrator (you) may allow participants (yourself and your spouse) to self-certify that you are a CVRD Qualified Participant.
Q5. How much can be taken out of the Solo 401k for a CVRD?
A5. Your distribution cannot exceed $100,000 (or your vested account balance, whichever is less).
Q6. What are the tax implications of taking a Coronavirus-Related Distribution?
A6. The 10% early withdrawal penalty tax is waived for CVRD. The pre-tax portion of the CVRD is subject to normal taxation (ordinary business income). However, you can spread the taxable income evenly over 3 taxable years beginning with the 2020 tax filing.
Q7. Can a CVRD be repaid?
A7. Yes. You have three years starting from the day following the day the distribution was received.
This is important: If you need to take money out of your Solo 401k as a Coronavirus related distribution, you can remove up to $100,000 and either:
- Pay taxes over 3 years for the funds you distributed (less tax hit all at once), or
- Pay the distribution back within 3 years and avoid taxation
Q8. Does the Solo 401k have to be amended before CVRDs are allowed?
A8. No, Solo 401ks may operationally allow for CVRDs before the plan is formally amended. The amendment deadline is the last day of the plan year beginning on or after January 1, 2022 (or a later date if specified by the Secretary of the Treasury).
We are currently working on an amendment, but it should not be expected before at least 2021.
Coronavirus-Related Loan Provisions
Q9. Are there special loan provisions for Coronavirus-Related Distributions if I qualify?
A9. Yes. The CARES Act has two main loan provisions:
- An increase in the amounts used to determine the maximum loan amount allowed.
- A delay in repayment for new and existing loans.
Q10. What are the changes to the loan maximum calculations?
A10. For any Solo 401k participant loan you initiate from March 27, 2020 through September 22, 2020, you can take out $100,000 or 100% of the vested amount (whichever is less). This is double the normal loan provision (typically $50k or 50% of vested balance).
Q11. What are the loan repayment changes?
A11. New or existing participant loan repayments from March 27, 2020 thru December 31, 2020 can be delayed by a year. Loan payments will restart with any payments due on or after January 1, 2021. The skipped payments (and any interest that accrued on those skipped payments) must be repaid starting on the one-year anniversary of the first skipped payment.
When your loan repayments re-start, your repayment amount will be adjusted to account for the missed interest. Additionally, the maximum repayment period (5 years for most loans) will be extended by the time frame in which payments were skipped.
Q12. Does the Solo 401k have to be amended before the loan provisions are utilized?
A12. No, your Solo 401k may operationally use the loan provisions before the plan is formally amended. The amendment deadline is the last day of the plan year beginning on or after January 1, 2022 (or a later date if specified by the Secretary of the Treasury).
2020 RMD Waiver
Q13. Can the Solo 401k waive the 2020 RMD requirements?
A13. Yes
Q14. What RMDs are waived?
A14. Any RMDs required in the 2020 calendar year. This includes first year RMDs that have a required beginning date in 2020.
Q15. What if I’m turning 72 in 2020?
A15. 2020 is disregarded in determining the required beginning date. If you turn 72 in 2020, your RMD schedule will be treated as if you turned 72 in 2021.
Q16. If I’ve already taken their RMD, can I roll it back into the Solo 401k?
A16. Yes, if you already took out the funds you have 60 days to put money back; or you can treat the distribution as part of the $100,000 maximum Coronavirus-related distribution.
Other Distribution Issues
Q17. Are there any special rules for hardship for COVID-19?
A17. No. The normal hardship rules apply.
Q18. My state is in an area with a declared state of emergency, does that change my ability to take hardship distributions without penalty?
A18. No, your state must be federally declared a disaster to trigger the disaster area relief provisions in retirement plans.
Coronavirus Contributions Solo 401k Deadline
Q19. Since the tax deadline was extended to July 15th, is 2019 contributions deadline extended too?
A19. We have not yet received guidance from the IRS that contribution deadlines are extended. However, according to IRS publication 560, you have until the employer tax return is filed to make your contributions. Therefore, if you are not filing until the new July 15th deadline, you can make your contributions until that date as well.
We realize these are uncertain and confusing times for everyone. Take comfort in the fact that now more than ever it’s important to be in control of your retirement funds. The entire Nabers Group team is here to support you if you have questions or concerns as you navigate the coming weeks and months.
Small Business Loans/Unemployment
We will have continuing coverage on small business loans and unemployment options for small business owners as the situation continues to develop. Keep checking back here for more news and information.
Now more than ever you need to be in control of your retirement funds. If you know someone who can benefit from a Solo 401k, refer them here and we will reach out to see how we can help.
Stay safe and healthy,
Rachel Nabers
Vice President
Solo401k.com
Nabers Group LLC
10 Responses
Thank you for these details. My question is can one take both a $100k distribution and a $100k loan?
Thank you.
Scott
Hi Scott, the CARES Act language doesn’t appear to disallow both at the same time. If you have sufficient funds in the account, it is presumable you could take both a $100k distribution (and pay the taxes over 3 years, or return funds to the plan within 3 years) and take the $100k loan (paying any interest + principle back into the plan as well). As we still lack guidance from the IRS on implementation of the CARES Act, make sure you are proceeding thoughtfully and with the guidance of your CPA and/or tax advisor.
Individuals may take a CARES Act distribution (up to $100,000) from a Roth IRA account and needn’t repay it for 3 years, without losing its Roth status.
Under normal circumstances, it is NOT possible to rollover a Roth IRA to a Roth 401(K), even though it is possible to rollover a Roth 401(K) to a Roth IRA.
If I take a CARES Act distribution from a Roth IRA, can I repay that amount back to my Solo 401(K), if done within 3 years?
… repay the distribution to a Roth Solo 401(K)
Hi James, thanks for your comment here! Even with the CARES Act distribution and repayment, you cannot remove funds from a Roth IRA and put them back into a Roth 401k. The distribution/repayment must be “like for like”.
Hoping you guys can tell me as I can’t figure it out on my own. I have an employer 401k that I am planning a CVRD from there and paying back in 3 years into my Solo401k. I am working a plan for investing a portion of this distribution. What if that investment goes south and I only have 70% of the original CVRD? I assume I’ll be taxed on the 30% but I’m wondering if there are penalties?
Great question and happy to help here! Guidance from the IRS is still developing so we don’t have a cut and dried answer here just yet.
As an example, our best estimate is that if you take a $100,000 distribution and only pay back $70,000 – then you will owe taxes on the $30,000 that is still outstanding. It’s not clear if any additional penalties will be levied on the portion not repaid, but we don’t see any of that in the law as it stands currently.
Of course, we always recommend you engage your CPA and/or tax advisor when dealing with tax-related questions, but we hope that will help you put together a solid plan!
I kept digging and your answer helped me ask better questions of Google. According to the IRS they plan to use the Katrina Emergency Tax Relief Act of 2005 as guidance for how CARES distributions will be handled as the distribution portions of both acts are similar.
These IRS resources are pretty clear on how the IRS is probably going to proceed, barring any further acts by Congress.
https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers Question 7 explains how to tax filing will work regarding payment back into any qualified plan. It also references sections of Notice 2005-92
https://www.irs.gov/pub/irs-drop/n-05-92.pdf Section 4.E. Example 1 on page 12 is really clear as to how CRVD tax treatment will most likely work.
Most likely this means the IRS will collect 1/3 of the distribution as regular income for each of the years 2020 through 2022. If 1/3 is paid back into a plan before filing 2020 return then you report no income from the CRVD in 2020. If one were to wait until 2022 to put 100% of the money back then amended returns for 2020 and 2021 must be filed to be refunded any taxes previously paid.
Depending on whether the desired investment would constitute a prohibited transaction, or not, and/or whether you wanted the investment to be owned by the 401(k) or not.
You can always takes a CARES Act distribution and repay it immediately to your Solo401(k), then use the 401(k) to do the investment. However, if the investment is a prohibited transaction, then this wouldn’t work.
An alternative solution, depending on the language in your Solo 401(k) plan, could be that you take up to a $100,000 CARES Act loan from your Solo 401(k), after transferring the up to $100,000 in assets from the employer 401(k).
You are right, Reynolds! Fortunately, all of our Solo 401k plan language allows for the most flexibility possible so your solution would be feasible without issue. Thank you for the great points!