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.
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:QuarantinedFurloughedLaid offReduced work hours due to COVID-19Unable to work due to lack of child care due to COVID-19Closed or reduced hours of the business the participant owns or operates due to COVID-19
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).
Ready to pay back your CARES Act distribution? Click here for the CARES Act repayment form.