401(k): CAA Expanded Loan and Withdrawal Provisions Differ from CARES Act

Earlier this year, in response to the passage of the Consolidated Appropriations Act of 2021 (“CAA”) on December 27, 2020, we provided information relative to provisions within the Act that impacted 401(k) plans. This article is intended to clarify the differences between that legislation and similar provisions included in the earlier CARES Act (see below).

Background – CARES Act. In response to the global COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020. The act contained a number of provisions directly relating to 401(k) retirement plans. (See our article entitled “Congress Passes CARES Act in Response to COVID-19 Crisis, Contains 401(k) Ease-of-Access Provisions“ for details.) Central to our discussion here were two provisions: (i) temporary expanded access to penalty-free withdrawals (similar to ordinary hardship distributions); and (ii) temporary doubling of the existing 401(k) plan loan limits.

First, the CARES Act created “Coronavirus-Related Distributions,” which were distributions made from a 401(k) plan during 2020 to certain “qualified individuals” affected by the COVID-19 crisis. Generally stated, recipients or certain family members had to be directly or indirectly affected by the COVID-19 pandemic, in accordance with rules specifically set forth in the CARES Act and subsequent guidance.

Second, the CARES Act effectively doubled both the dollar limit and the percentage limit for participant loans under 401(k) plans. In other words, qualified individuals were able to borrow up to the lesser of: (i) $100,000 (up from $50,000); or (ii) 100 percent of his or her vested account balance (up from 50 percent of the vested account balance).

Coronavirus-Related Distributions were effective from January 1, 2020 through December 30, 2020. The temporary expanded 401(k) plan loan provisions were in effect for a 180-day period which began on March 27, 2020 and ended on September 23, 2020. Importantly, these CARES Act provisions were not explicitly extended by CAA or any other legislation.

CAA. On December 27, 2020, President Trump signed the CAA, which contained a variety of stimulus provisions related to the continuing COVID-19 pandemic. Like the CARES Act, some of the CAA provisions directly affect 401(k) retirement plans. In particular, there are, here again, both temporary expanded access to penalty-free withdrawals, along with temporary doubling of plan loan dollar and percentage limits – provisions which, on the surface, look extremely similar to those in the CARES Act. Both the CAA’s 401(k) withdrawal and loan provisions are currently set to expire on June 25, 2021.

Instead of “Coronavirus-Related Distributions,” the CAA withdrawal provisions are called “Qualified Disaster Distributions,” and are defined as any distribution made from an eligible retirement plan (including a 401(k) plan) on or after the first day of the occurrence of a “qualified disaster” as declared by the President under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. To qualify, the individual’s principal place of abode during the incident period must be located in a “qualified disaster area,” and the individual must have sustained an economic loss by virtue of the disaster. However, the CAA provision includes a specific and surprising exclusion for “any area with respect to which such a major disaster has been so declared only by reason of COVID-19” (emphasis supplied).

Similarly, the CAA-expanded loan dollar and temporarily increased percentage and dollar limits are available to “qualified individuals” who are affected by a “qualified disaster,” as set forth above. Accordingly, it appears that, as previously stated, both the expanded loan provisions and “Qualified Disaster Distributions” are intended for 401(k) participants and beneficiaries who are affected by “qualified disasters” strictly as defined under CAA, and are not specifically geared to expenses incurred or related to COVID-19.

OBSERVATION: Notably, the exclusionary language doesn’t actually preclude distributions or loans for individuals who live in COVID-affected areas — the qualified disaster just needs to have been declared based on some other reason. So, for example, if a participant lives in an area that meets the CAA definition of a “Qualified Disaster Area” because of a severe weather-related event, that participant could take out a $100,000 loan and use it for expenses directly related to such event, even though there is also a COVID-19 emergency in effect in the same area.

The information and content contained in this blog post are for general informational purposes only, and does not, and is not intended to, constitute legal advice. As always, for specific questions concerning your 401(k) retirement plan, or for help in operating your plan during the current COVID-19 crisis, please consult your own ERISA attorney or professional advisor.