401k loan defaults during Cares Act
If someone under 55 defaults on a 401k loan from a prior employer, is it exempt from the 10% penalty as other distributions are?
If someone under 55 is recently laid off and has an outstanding 401K loan but has not yet defaulted are there CARES Act relief options?
- Qualifying for any loan benefits or for a CRD have the same requirements, so the layoff must be related to Covid. That should not be hard to establish. However, the employer does not have to allow loan benefits under CARES or CRDs. The participant should call the plan and ask if they offer CARES loan benefits. If they do, one such benefit if the plan is able to process an offset distribution by 12/30, the taxes due on that distribution can be paid over 3 years since the offset distribution can be treated as a CRD. When was the full loan payment due?
- The delay of loan payment CARES benefit is about expired. It allows any payments due through the end of 2020 to be extended for up to 1 year. At most that is only one payment plus payments already late, and again, this is optional for the plan. Payments due after December cannot be extended.
- Since no adoption or partial option of the CARES loan provisions is allowed, the best thing to do is to call the plan administrator, and hopefully someone up to speed will be available to explain the loan options.
Permalink Submitted by Alan - IRA critic on Wed, 2020-11-18 01:58
First, if the plan has adopted the CARES Act provision that allows loan payments due after March to be extended by 12 months, the participant has not yet defaulted. However, the plan does not have to adopt ANY of the CARES loan provisions. If the participant therefore defaults and triggers an offset distribution of the loan balance, if they qualify for a CRD (same provisions apply to loans), the offset distribution will not be subject to penalty, and can also be rolled over for a period of 3 years after the offset distribution if desired.