In response to the COVID-19 pandemic, Congress issued the CARES Act, which expands eligibility and alters the regulations regarding 401(k) loans. The CARES Act allows you to borrow 100% of your account balance up to $100,000 (less any previously outstanding loans), which is a significant increase from the $50,000 limit prior to the act. Currently, you can borrow up to this increased limit through September 22, 2020. Additionally, for any loans outstanding on or after March 27, 2020, the IRS is allowing for payments due through December 31, 2020 to be delayed up to one year. However, you must be a qualified individual to benefit from these changes.
Who is considered a qualified individual?
- Anyone who is diagnosed with the COVID-19 (this includes your spouse or dependents). Note that the test must be approved by the Centers for Disease Control and Prevention.
- You experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to the COVID-19 pandemic.
- You experience adverse financial consequences as a result of being unable to work due to lack of childcare due to the COVID-19 pandemic.
- You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to the COVID-19 pandemic.
It is important to note that these loan changes under Section 2202 of the CARES Act are optional for employers to adopt. According to the IRS, an employer can choose whether to adopt and to what extent they will amend their plan relating to the CARES Act. Prior to requesting a loan due to impacts of COVID-19, contact your employer to determine if your 401(k) plan was amended to adopt the changes of the CARES Act.