The Coronavirus Aid, Relief and Economic Security (CARES) Act impacts solo 401k plans in a variety of ways. Below are some FAQs to help self-directed solo 401k participants navigate the new Act.
Solo 401k Withdrawals
In order to qualify, it must fall under COVID-19 Related Distribution (CRD). To qualify for the distribution, the participant, or his or her spouse or dependent, must have been diagnosed with COVID-19 (a CDC-approve trust applies), or the individual suffered adverse financial consequences due to COVID-19 (e.g., closing or reducing hours of business, laid off, reduced work hours, furloughed, unable to work due to lack of child care, etc.).
If you have already paid taxes on a solo 401k distribution that you later decide to repay, you will need to file an amended personal Form 1040 tax return to recover the taxes.
Yes. The limit is up to $100,000 per solo 401k participant. For example, if both spouses hold funds in the solo 401k plan, each can distribute up to $100,000 from their respective participant account under the plan. Also, if you maintain multiple solo 401k plans, the $100,000 is aggregated so it does not apply separately to each plan.
COVID-19 distributions are aggregated between IRAs and solo 401k plans. Therefore, if you already took the full allowed coronavirus limit of $100,000 from your IRA, then you won’t be able to take a coronavirus related distribution from the solo 401k plan. There are not restrictions on how the distributed funds are used.
Yes. The distribution can be repaid to the solo 401k plan or to another 401k plan. The solo 401k distribution can also be repaid to an IRA instead. This has to happen within a three-year period following the distribution and it will be treated as non-taxable rollover so that taxes can still be deferred.
Yes. If The Roth solo 401k distribution is non qualified (Click here to learn about the qualified vs non-qualified Roth solo 401k distribution rules.) it will include pro rata share of basis and gains…if qualify under cares act this satisfied as triggering event and will allow the taxable amount not to be subject to penalty and to spread taxes on taxable portion over three years.
Lastly, yes you can process the CRD related aggregate distribution amount of $100,000 in addition to processing the $100,000 401k participant loan amount from each 401k plan.
Solo 401k Participant Loans
The Act also allows those affected by COVID-19 to take lesser of $100,000 (reduced by outstanding loans) or 100% of the solo 401k account balance. This only applies to solo 401k participant loans made on or before Sept. 23, 2020 (180 days following enactment of CARES Act). You also have to meet the same COVID-19 conditions listed above under the distribution FAQs.
While those impacted by COVID-19 virus can take a loan equal to 100% of the balance up to $100k, the multiple loan rules apply if you already have an outstanding from your solo 401k plan. Per the multiple 401k loan rules, the amount of the loan must be reduced by the highest outstanding balance of any other solo 401k participant loan over the prior 12 months (regardless of whether such other loan is currently outstanding).
On June 19, 2020 the IRS released updated guidance in IRS Notice 2020-50 regarding taking distributions and processing 401k participant loans under a COVID-19 triggering event. Prior to this notice, many in the industry understood that if the 401k account holders defaulted on their solo 401k participant loans in 2020 it could be treated as a coronavirus related distribution (CRD); however, in IRA Notice 2020-50 the IRS clarified that 401k participant loans that go into default do not qualify to later be treated as a coronavirus related distribution (CRD). This is an important rule, because CRDs do qualify for the repayment of the distribution over 3 (three) years.
Determine if I Qualify
The Act defines a CRD as:
- is diagnosed with COVID-19, with a CDC-approved test;
- whose spouse or dependent is diagnosed with COVID-19, with a CDC-approved test;
- who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or
- other factors as determined by the Treasury Secretary.
- Individuals are permitted to pay tax on the income from the hardship distributions over a three-year period.
- Individuals may choose to repay hardship distribution amounts back to the plan over the next three years.
- The repayments do not count toward the annual retirement account contribution limits.
The solo 401k trustee, not the solo 401k plan provider, will need to retain records of eligibility. However, the solo 401k plan provider will prepare the participant loan documents, the distribution form and issue the required Form 1099-R for the qualifying distribution.
Solo 401k Required Minimum Distributions
If your already made your solo 401k RMD in 2020, then you may roll it back into the solo 401k plan or to a Traditional IRA.
For example, Ben turned turned 70 1/2 in 2019, so his first RMD would be due by April 1, 2020.
- Ben did not take the distribution in 2019 but instead is waiting to take it by April 1, 2020. However, because of the CARES Act, Ben is not required to take his 2019 RMD by April 1, 202o. Ben is also not required to take the 2020 RMD by December 31, 2020.
- If Ben did take his first RMD (the 2019) by April 1, 2020, it is subject to the waiver for 2020 and the amount can be rolled over to a Traditional IRA or back to the solo 401k plan.
- However, if Ben took his 2019 RMD in 2019, he cannot roll it over to an IRA or back to the solo 401k plan.
IMPORTANT: Until the IRS releases more guidance, if you took an RMD from your solo 401k plan between February 1 and May 15, 2020, you have until July 15, 2020 to roll over the RMD payment back to the solo 401k plan or to an IRA. However, if you took the RMD in January 2020 and after May 15, 2020, you have 60 days from the date the distribution was received to roll it over to an IRA or back to the solo 401k plan.