The CARES Act 401k Withdrawal Complete Guide

CARES Act 401k Withdrawal
Table of Contents

The pandemic threw many Americans and businesses for a loop, and many people struggled to stay on top of their bills and business expenses. The number of active business owners plummeted by three million from February to April 2020.

To provide people with additional financial options, the federal government approved the CARES Act, which included the CARES Act 401k withdrawal option. If you’ve heard about this withdrawal option and you want to learn more about it and how you can use it, continue reading below. This brief CARES Act guide will cover all you need to know about the 401(k) withdrawal option and who you can contact for more information. 

What The CARES Act 401K Withdrawal Affects

The CARES act affects retirement accounts, such as 401(k) accounts, by lifting penalties for early withdrawal. Employees affected by the coronavirus who have 401(k) accounts are able to access their retirement accounts for up to $100,000. Those who have already borrowed against their retirement accounts will receive an extension of time to repay back their loans. 

Key Facts About The CARES Act 401K Withdrawal

  • Allows employees to take up to $100,000 from their 401K without incurring early withdrawal penalties.
  • The withdrawal is considered a loan and must be repaid within three years.
  • Contributions can still be made to the 401K during repayment of the loan.
  • The taxes may or may not be deferred, depending on individual circumstances.
  • Payments can spread out over multiple years and amount can be adjusted in consultation with a financial advisor.
  • To be eligible for the withdrawal program, individuals must have been adversely impacted by Coronavirus pandemic, either financially or health wise.

CARES Act 401K Withdrawal Qualifications (2022)

The CARES Act defines your withdrawal transaction as coronavirus-related if the loan or withdrawal took place between March 27, 2020, and December 31, 2020. The reason for taking out the loan or withdrawal must be because of the virus. For example, if you received a COVID-19 diagnosis by a test approved by the CDC, you waive penalties for early withdrawal. 

Other CARES act 401(k) withdrawal qualifications:

  • Your dependent or spouse tested positive for SARS-CoV-2 or COVID-19
  • Your finances were harmed due to being laid off or furloughed
  • You are self-employed, and the virus caused you to reduce business hours or close
  • You worked fewer hours because you could not get child care

Even if you were lucky enough to evade contracting the virus, your bank account might not have been so fortunate. With the virus causing many non-essential businesses to close down and for essential business hours being limited, it caused many Americans financial issues.

Not every company had the capability to transition to remote work, and even if they did, it took a long time to transition fully. This caused a lot of child care issues, especially when schools started shutting down. 

Spread Out Your Taxable Income from the 401K Withdrawal

Typically, when you make a withdrawal from a retirement account, it is taxed as income. If you withdraw $40,000, you must pay taxes on that $40,000 for the tax year. Under the CARES act, you are allowed to spread out your income tax liability over the course of three years. 

If you repay some of that distribution back, or all of it, the IRS will consider that amount a “rollover.” This means that it will not be subject to income tax. Before you make a withdrawal, be sure that your plan allows you to access your retirement account for hardship withdrawals. 

Alternatives to the CARES Act 2022 401K Withdrawal

If you are a business owner looking for alternate ways to fund your small business during this challenging time, you still have time. Thanks to the recent Infrastructure and Investment Job Act, signed in November of 2021, you can retroactively claim payroll tax credits through the ERTC. 

What Is the ERTC?

The ERTC, also known as the Employee Retention Tax Credit, is a refundable tax credit that rewards you up to $26,000 per employee. This tax credit was initially designed to encourage and reward businesses for keeping their employees on payroll. This credit provides more financial relief to employers who struggled during the pandemic. 

Eligible Businesses

Suppose you are a tax-exempt organization or a private business forced to close partially or wholly due to state, local, or federal government orders. In that case, you are eligible to apply for this credit. You are also eligible if you experienced a 50% decline in gross receipts during any quarter in 2020. 

This program is available for all businesses, and there is no cap on employees. Although there is no cap, small companies have an easier time taking advantage of this program. 

How to Claim the Credit

To claim the ERTC credit retroactively, you must file Form 941-X. The Internal Revenue Service allows your business three years after the initial date of filing to adjust previous payroll filings. If you need to file the credit currently, you will file Form 941, and if you wish to file the credit in advance, you will need to use Form 7200.

How to Calculate Your Available Credit

It is strongly recommended that you partner with an organization with experience filing for the ERTC credit or who has experience with financials. You can reach out to your CPA for more information, or you can reach out to a company like ERC Today to walk through the steps of figuring out your tax credit. 

If your business received a PPP loan, you might still be eligible for the Employee Retention Tax Credit. To ensure that your paperwork is correct, make sure that you work with a reputable employee retention tax credit company to ensure you get the credit your business deserves. 

CARES Act 401K Withdrawal Information

The CARES Act 401(k) withdrawal option allowed many Americans and business owners to access additional cash to take care of their needs. If you took out a loan during that time, there are ways to stretch out your tax liability.

Contact us now if you want to learn more about the employee retention tax credit and how you can retroactively claim your payroll taxes. Our team has the experience and expertise you need to properly file your Form 941-X to ensure the IRS provides you with the credit you need. We also offer free no-obligation initial evaluations!

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