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We’ve all experienced the outsize impact the coronavirus has had on our lives, our small businesses, and the overall economy. Many small business owners had to close their doors (hopefully only temporarily) or alter their business models, creating, among other things, a cash shortage. Business owners needed money—and they needed it fast.

How did they get it?

I talked to Kristin Andreski, SVP and General Manager of ADP Retirement Services about the business owners and their retirement funds.

You noticed a growing trend of small business owners dipping into their retirement savings as the pandemic continued to affect us.

Kristin Andreski: Our Service Teams did see an increase in inquiries from small business owners to understand their options, for them personally as well as their workforce. Participants are opting for distributions/withdrawals [and not] loans. This may be attributable to participants having concerns that it might be difficult to pay back a loan in the current environment.

In fact, 57% of all in-service withdrawals have been CRDs and 60% of distributions requested were for the maximum amount allowed by the CARES Act.

[Writer’s Note: The CARES Act is the coronavirus stimulus package passed by Congress earlier this year. It allows people, who are not yet 59½ years old (the normal rule), to withdraw up to $100,000 from their retirement accounts (IRA, 401(k), etc.) without paying the 10% penalty. This withdrawal is referred to as a “coronavirus related distribution” or CRD.]

How widespread are these withdrawals Is it nationwide or concentrated in a few regions?

Andreski: The CRDs taken align with the regional location of our clients:

• 29% were from the Northeast region
• 28% were from the West region
• 14% were from the Southeast region
• 15% were from the Midwest region
• 12% were from the Southwest region

Does it seem to be from people who are over 50, or an across-the-board activity?

Andreski: The COVID-19-related distributions by age has been:

• 25 and younger—3%  
• 26-35—24%
• 36-45—30%
• 46-55—29%
• 55-65—13%
• 65 and older—1%

Do we know why this is happening? Is it a “last resort” act?

Andreski: The CARES Act provides financial relief to small businesses and their employees who were and continue to face economic hardships caused by the coronavirus pandemic.

What advice would you give small business owners or their employees who feel they need to do this?

Andreski: If a small business owner or participant finds themselves in a hardship situation due to the coronavirus and needs to access their funds, they should do it. That’s the purpose of the legislation—providing relief where needed. It’s always important to consult with a financial, tax, or legal advisor to obtain the guidance relative to the personal situation of the participant or business owner.

However, the CARES Act does allow for withdrawals in advance of employment termination where they may not have otherwise had access to those funds. Plus, the early distribution tax is waived as an additional benefit. And, unlike hardship withdrawals under the current rule, participants can repay the money back to their retirement plans, avoid any income taxes due on repaid amounts and, make up some of the financial ground they may have otherwise lost.

Now more than ever, workplace benefits like retirement plans are critical to protecting workers from further financial stress. Saving for retirement is an investment in one’s future and repaying the funds withdrawn is a step in the right direction for any financial journey.

Are there are tax consequences to withdrawing the money?

Andreski: Coronavirus-related distributions in 2020 do not impose the 20% mandatory withholding and do not incur the 10% early distribution tax that normally applies to withdrawals made prior to age 591/2. The income taxes due on the distribution amount are optionally includable over a three-year period. And, the distribution may be repaid to an eligible retirement plan or IRA within three years of taking the distribution.

When the pandemic ends, is there a way for business owners and their employees to make up for what they took out? Double up on deposits?

Andreski: Repaying the money withdrawn from their retirement plan is the best first step. Not only will that help the business owner and the participants avoid any income taxes due on withdrawn amounts, but it will also help them make up some of the financial ground otherwise lost.

Contributing to a retirement plan is an important way to save for the future. Contributing as much as financially possible is a good idea. Working with a financial advisor or financial planner is a great way for participants to determine the best savings strategy for their personal situation.

Not sure if withdrawing money from your retirement account is the right thing to do? In addition to a financial advisor (or if you don’t yet have one), you can review your situation with your SCORE mentor who can help guide you to making the best decision for you and your company.