Shoulda, Coulda, Woulda

April 30, 2020

Shoulda, Coulda, Woulda

Taking Participant Loans or Distributions Under CARES Act

The majority of questions in these difficult times revolve around borrowing money from retirement plans.

Most retirement plans sponsored by employers have participant loan availability.  You do not have to be a qualifying individual or have your employer adopt CARES Act provisions to take a loan. However, if you are a qualifying individual the loan, whether existing or new, it can be suspended for one year. 

If your employer adopts the provisions of the CARES Act the loan may be increased from the lesser of 50% of your vested account, with the value not to exceed $50,000 to 100% of your account balance up to $100,000. These loans must be paid back in five years or longer, if used to purchase ar primary residence.

Another way to take out money, if you qualify, is through a CRD explained below.

For an explanation of the retirement plan provisions in the CARES Act and who qualifies, see our article on our website at called ­­”­­­­­­­­­­­­­­­­­­­­­­­­ CARES Act Retirement Plan Provisions.”

Below are Frequently Asked Questions Regarding Loans and Distributions:

Participant Loans & Distributions

Q. If my employer adopts the CARES Act provisions for loans and distributions and I qualify, what are my options?

A.  You can take a participant loan, Coronavirus Relief Distribution (CRD) or both.

 If your plan has a loan provision and your employer adopts the CARES Act, you now can take more than 50% or $50,000. The limit goes up to 100% of your account, but can no greater than $100,000.  However, this limit is the maximum and your employer may not allow this higher amount.

There is also a distribution called a Coronavirus Relief Distribution (CRD).  This isn’t a hardship distribution, however it looks like one, with the exception that the distribution can be paid back in up to three years.  For example, you can pay one-third the amount each year or all at the end of three years.

What Is a Coronavirus Relief Distribution (CRD)?

A CRD is a distribution from an eligible retirement plan for a plan participant (current or former employee) that meets the following requirements:

•          The distribution occurs on or after January 1, 2020, and before December 31, 2020.

•          Definition of “qualifying Individual” under the CARES Act

o          An individual who is diagnosed with the virus SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention

o          An individual whose spouse has been diagnosed with COVID-19

o          An individual who experiences adverse financial consequences because of one of the following: due to COVID-19

o          The individual was quarantined, furloughed, or laid off

o          The individual’s work hours were reduced

o          The individual was unable to work because of the lack of childcare

o          The business that the individual owned or operated was curtailed or closed


Having Your Salary Reduced with Same Hours Doesn’t Qualify.

Q. Should I take a loan or a CRD?

A. There is no quick answer to this question.

Loan payments taken between March 27, 2020 and December 31, 2020 will be suspended for one year.CRDs do not have to be repaid and they are taxable. The loan is amortized for as much as five years and  interest begins on the date  the loan is taken.

A CRD is a distribution that does not have to be repaid, but it may be repaid. For example, if you take a loan for $60,000 prior to December 31, 2020, the entire $60,000 is taxable. And you can spread the taxes over three years. Prior to the end of three years, whatever amount is repaid, will qualify  you to get a tax refund by refiling your tax return.


In order to determine  if a loan or CRD is right for you, the decision requires you to know as best you can, a few predictions about your future such as: 1. Your current employment 2. Your ability to pay the money back to yourself in the plan 3. Your tax situation. We strongly recommend you seek help from your financial adviser as to whether to take a loan a CRD or both.

Q. Do I have other options to take funds from my 401(k) plan, if my employer has not adopted the CARES Act with increased loan and distributions options?

A. If your plan already has participant loans provisions, you are eligible to take a standard loan. Some plans also have hardship distributions. and if you need to qualify for a hardship which, this generally means you don’t have other money available. The hardship is taxable and there is 20% withholding that would go toward your taxes, in addition to  a 10% penalty imposed by the government. 

Q. If I’m laid off or furloughed from my work are my participant loan payments suspended?

A. There are just two scenarios under which the IRS will allow a plan to suspend loan repayments of a participant with an outstanding loan1) Leave of absence of up to one year 2) Leave or the period during which an employee is performing military service.

Upon return, the participant must make up the missed payments by either increasing the amount of each monthly payment or by paying a lump sum, and the term of the loan does not exceed the original five-year term.

If the employee qualifies under the CARES Act (see definition of qualifying individual) then loan payments are suspended up to December 31, 2020. The participant promissory note is then re-amortized with interest from the date of suspension.

Q. If an employee is entitled to paid time off (PTO) should we turn off their 401k deferral?

A. Most plans define compensation as gross pay. Generally, PTO is included in compensation so unless the employee requests a change in their 401(k) deferral, an employer  should continue with their payroll deferral. Review your plan document’s definition of compensation.

Q. Can I change my plan’s definition of compensation to exclude PTO?

A. Maybe.  The general rule is if the plan requires a contribution either for a safe harbor or profit sharing contribution, changes must be made at the beginning of the plan year. If the contribution is discretionary then it can be changed during the year. Check with your TPA, because discretionary versus required contributions can be confusing.


Please contact you BEI representative for assistance.

Author: Robert Gorelick, APA, Founder Benefit Equity Inc.