Increased Maximum Solo 401k Plan Loan Amount for Those Impacted by Coronavirus (COVID-19) (CARES Act)
Solo 401k plan loan maximum for a qualified Individual (defined as meeting the COVID-19 or SARs-CoV-2 conditions described below) is increased to the lesser of $100,000 or 100 percent of the participant’s vested balance. This increased amount applies to loans made during the 180-day period beginning on March 27, 2020.
NEW LOANS
ANSWER:
The CARES Act which was enacted to provide relief to individuals impacted by COVID-19 allows for increased 401k loans and more flexibility for repayment of these loans.
Specifically, you must be an individual who meets one of the following conditions to demonstrate that you have been impacted by the crisis (and it will be your responsibility to retain documents in your files that demonstrates that you are a qualified individual):
-
- Individual who is diagnosed with COVID-19, with a CDC-approved test;
- Individual whose spouse or dependent is diagnosed with COVID-19, with a CDC-approved test; OR
- Individual 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.
On or before September 23, 2020, such individuals take a 401k participant loan subject to the following terms:
- Maximum Amount of the Loan: 100% of their 401k balance not to exceed $100,000. Please note that per the multiple loan rules, the amount of the loan must be reduced by the highest outstanding balance of any other 401k participant loan over the prior 12 months (regardless of whether such other loan is currently outstanding).
- Monthly or Quarterly Payments: The loan must be paid back in equal monthly or quarterly payments of principal and interest.
- Interest Rate: The interest rate is equal to prime plus 1% (or CD rate plus 2%) and is a fixed rate that is set at the time that the loan is taken.
- Term of the Loan: Five-year term unless the proceeds of the loan are used to purchase a primary residence in which case the term of the loan may be up to 30 years.
- First Payment:
- For monthly payments, the first payment that would otherwise be due is delayed until January 2021 (e.g. if the first monthly payment would have been due on May 15, 2020, it will be due on January 15, 2021).
- For quarterly payments, the first payment that would otherwise be due is delayed until the first quarter of 2021 (e.g. if the first quarterly payment would have been due on May 15, 2020, it will be due on February 15, 2021).
EXISTING LOANS:
ANSWER:
The CARES Act which was enacted to provide relief to individuals impacted by COVID-19 allows for increased 401k loans and more flexibility for repayment of these loans.
Specifically, you must be an individual who meets one of the following conditions to demonstrate that you have been impacted by the crisis (and it will be your responsibility to retain documents in your files that demonstrates that you are a qualified individual):
-
- Individual who is diagnosed with COVID-19, with a CDC-approved test;
- Individual whose spouse or dependent is diagnosed with COVID-19, with a CDC-approved test; OR
- Individual 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.
If you meet the above conditions:
- You may delay making any 401k loan payments due between 3/27/2020 and 12/31/2020.
- You must commence making loan payments in January 2021 (or the first quarter of 2021 if your loan payments are due on a quarterly basis).
- If you elect to delay making such loan payments, the term of your loan will be appropriately extended. For example, if there are 10 monthly loan payments remaining on your 401k participant loan and the next payment is due April 15, 2020, you can elect to delay making such payments until January 15, 2021 and at that time would need to make 10 more monthly payments through October 15, 2021.
Once the solo 401k has been funded, there is no waiting period for processing a solo 401k participant loan.
You, as trustee/participant can take a loan/borrow from Solo 401k for any reason.
Following are some quick facts regarding the solo 401k participant loan rules.
- Each participant can borrow from the solo 401k provided each has a solo 401k balance; however, the solo 401k loan calculation is based on each solo 41k participant’s respective loan balance–not the entire value of the solo 401k plan.
- The solo 401k loan does not affect your personal credit or business credit score because you are borrowing from the solo 401k plan; therefore, there is no credit check.
- The Solo 401k loan term is 5 years for general loans.
- The Solo 401k loan term can be more than 5 years not to exceed 15 years if used to purchase principal residence for you as trustee/participant of the Solo 401k.
- Solo 401k loan payments are made either monthly or quarterly.
- Solo 401k annual contributions from self-employment income cannot be used/applied towards payment of solo 401k participant loans.
- Solo 401k participant loan payments must be made with personal funds, not business funds or solo 401k funds.
- Since the solo 401k participant is borrowing from the solo 401k plan, at time of loan the loan proceeds must flow to the solo 401k participant’s bank account, not her business. Once the funds are in your personal bank account, you can then disburse them however you wish including placing them in your own business bank account.
- The interest rate for Solo 401k loan is either: A certificate deposit rate plus 2 percent or the prime rate plus 1 percent.
- Solo 401k Loan payments are fixed payments consisting of interest and principal
- Solo 401k loan rules do not allow for Interest only payments or principal payments only.
- Each solo 401k participant can borrow from his or her respective solo 401k balance. For example, if both spouse’s are participating in the solo 401k plan and have account balances, each can borrow up to the statutory limits described below.
- The maximum Solo 401k loan amount is either 50% of account balance or maximum amount of $50K.
– Example 1: Solo 401k balance is $50K; 50% of $50K = $25K (the Solo 401k maximum loan amount)
– Example 2: Solo 401k balance is $150K; 50% of $150K = $75K; however, the maximum permitted Solo 401k loan amount is $50K
– The minimum Solo 401k loan amount is $1,000.
- The Solo 401k rules require the following proper Solo 401k loan documentation:
– Solo 401k Loan Agreement
– Solo 401k Loan Application
– Solo 401k Loan Payment Amortization Schedule
You can obtain more information regarding borrowing/taking a participant loan from a Solo 401k at: https://www.mysolo401k.net/Solo401kLoan.html
Primary Residence Rule QUESTION:
I have a question about the primary residence rules for loans. I’d like to pay down the balance on my primary residence because it would remove the PMI on the loan. Would this satisfy the IRS regulations about the 401k loan for primary residence so I can qualify for a longer repayment period?
ANSWER:
You can only borrow from your solo 401k for 5 years not 15 years because the 15 year rule applies to the purchase of a primary residence not the payoff of a primary residence.
Invest Loan Funds in Own Business QUESTION:
I own a small business where currently I am the sole employee. Is it possible for me to use some of my retirement funds to invest in that business, say for marketing purposes, to help me get it off the ground?
ANSWER:
You could take a solo 401k participant loan and then use those funds for any purpose including investing in your own business. See the following. https://www.mysolo401k.net/solo-401k-participant-loan-facts-borrowing-solo-401k-2/
- Client Success Stories:
Another option besides the solo 401k plan is our ROBS 401k plan (business financing 401k plan). The ROBS 401k allows for investing in stock of your own C-corporation so it is not considered a loan but rather and equity investment. To learn more about the ROBS 401k plan, see the following:
https://www.mysolo401k.net/401k-business-financing/business-financing-401k-robs/
https://www.mysolo401k.net/401k-business-financing/
Loan to My Own Business QUESTION:
Can I give my company a loan through my solo401k and pay back principle plus interest?
ANSWER:
A solo 401k participant loan to your own business is prohibited, but a solo 401k participant loan to you is allowed and you can do whatever you’d like with the loan proceeds including investing them in your own business.
Making Loan Payments Direct Deposit QUESTION:
Is it okay if I repay the solo 401k participant loan with direct ACH transfers between my personal bank account and the solo 401k Trust’s bank account?
ANSWER:
Yes that way you can place your solo 401k participant loan payments on autopilot, as the loan payments can be made by check or electronically. Depending on where you opened your solo 401k bank account, you will need to work with that financial institution to setup the ACH payments. For example, many of our clients use Fidelity Investments for their solo 401k bank account which allows for ACH transfers. See the following:
Early Payoff QUESTION:
ANSWER:
Is interest rate prorated QUESTION:
If I pay the solo 401k participant loan early, will the interest be prorated daily?
ANSWER:
Loan Frequency QUESTION:
ANSWER:
Pay Taxes On Loan Payments QUESTION:
When i repay a loan that I have taken from the 401K, do I pay taxes on the money that I used to repay the loan, or is it pretaxed?
ANSWER:
Interest Rate Deductible QUESTION:
ANSWER:
Interest Rate Deductible For Home Down Payment QUESTION:
ANSWER:
Administrator QUESTION:
ANSWER:
Borrow to pay high interest loan QUESTION:
Making Payments with Stock QUESTION:
Good questions. No there is no prepayment penalty. However, the loan has to be paid back with after-tax funds not with stocks.
Defer Payments QUESTION:
(Reg. Section 1.72(p)-1, Q&A-9(b))
Solo 401k Loan grace period for late payment
Effective January 1, 2002, Treas.Reg.1.72 (p)-1, Q&A 10, provides for a cure period that allows a loan participant to avoid an immediate deemed distribution following a missed payment. The cure period may not extend beyond the last day of the calendar quarter following the calendar quarter in which the required payment was due.
Borrow Just to Have Cash QUESTION:
Borrow from solo 401k LLC QUESTION:
I just found your website and found it to be very interesting.
I have a very precise technical question. I am familiar with IRA LLCs and the rules regarding them. But, not so much with the solo 401k rules.
I know you cannot borrow more than $50,000 from a 401k. However, what if one forms an LLC and the solo 401k invests in it? Can the LLC loan more than $50,000 to the owner/participant or to a trust owned by the owner/participant?
Loan Pay Off Notification QUESTION:
I wasn’t certain if I needed to notify you in regards to paying off my 401k participant loan? Do you need anything from me regarding the loan?
Loan Paperwork Shared with IRS QUESTION:
Do I understand correctly that the solo 401k loan paperwork you provide and that I execute is designed to evidence that this is a legitimate loan versus a taxable distribution? Will I have to share this paperwork with the IRS in the normal course of filing or how will I denote on next-year’s return that this was not a taxable distribution?
