CARES Act Provides Qualified Retirement Plan Loan Relief
By Michelle Freiholtz, MBA
Measures to provide relief to taxpayers for qualified retirement plan (QRP) loans in response to the coronavirus (COVID-19) pandemic have been enacted by the federal government and the IRS. Brought about by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and IRS Notice 2020-23, these measures briefly relax QRP loan regulations related to maximum loan amount, repayment, and rollover deadlines. The Department of Labor issued aligning loan relief in Employee Benefits Security Administration Disaster Relief Notice 2020-01.
Eligibility for Relief
The CARES Act provides relief to a “qualified individual,” who is defined as
any individual (or the spouse or dependent of the individual) who is diagnosed with the COVID-19 disease or the SARS-CoV-2 virus in an approved test; or
any individual who experiences adverse financial consequences as a result of being quarantined; being furloughed or laid off, or having work hours reduced due to such virus or disease; being unable to work due to lack of child care due to such virus or disease; closing, or reducing hours of a business owned or operated by the individual due to such virus or disease; or other factors as determined by the Secretary of the Treasury.
An employer not currently offering plan loans may permit loans to qualified individuals, as long as the employer amends the plan by the end of the plan year beginning on or after January 1, 2022, or such later date prescribed by the Secretary of Treasury (governmental plans have at least two additional years to be amended). Employer plans with existing loan provisions may operationally comply with the new rules until they retroactively amend their plans by the dates just mentioned. Just as employers are not obligated to adopt loan provisions in their plans under normal circumstances, they are also not obligated to adopt the more generous provisions provided by the CARES Act.
Unlike the extensive retirement plan-related relief within the CARES Act, individuals or entities wishing to avail themselves of the many deadline extensions provided in IRS Notice 2020-23 need not meet any condition of being directly or indirectly affected by the COVID-19 pandemic. Notice 2020-23 also does not require an employer to decide if the provisions will be adopted by the plan, which, in turn, means that an amendment is not needed.
Increased Loan Availability
In general, a plan cannot authorize a loan to a participant that exceeds the lesser of $50,000 reduced by the highest outstanding balance in the last 12 months, or one-half the vested account balance, reduced by the current outstanding balance of any loans. With enactment of the CARES Act, however—and plan permitting—the maximum loan amount for loans taken during the period from March 27, 2020, through September 22, 2020, can be authorized up to the lesser of $100,000 reduced by the highest outstanding balance in the last 12 months or 100 percent of the participant’s vested balance reduced by the current outstanding balance of any loans.
Loan Repayment
Most plan loans, other than those for a principal residence, must be repaid in full within five years from the date of the loan origination. Plan loans also must be repaid according to an amortization schedule that is substantially level, with payments consisting of both principal and interest, at least quarterly. Recent guidance, however, allows qualifying individuals to delay payments that are due between March 27, 2020, and December 31, 2020, for up to a year. In addition, the term of the loan can be extended for the time that the payments are delayed and loan repayments can be adjusted to disregard the time during which payments are delayed. Interest is not suspended during the delay, however, so the amortization schedule must reflect the interest accrued while loan payments are not being made.
IRS Notice 2020-23 more broadly extends the deadline to make any plan loan repayment to July 15, 2020, if is due between April 1, 2020, and July 14, 2020. It is not necessary to have a coronavirus-related loan in order to take advantage of this extension. This guidance merely gives borrowers a momentary break from payments. Further, it does not extend the repayment terms or allow borrowers to re-amortize their loans. Although the coronavirus-related loan provisions are optional, the delayed loan repayment provisions in IRS Notice 2020-23 (as referenced in Revenue Procedure 2018-58) are not.
Rollover Deadline
IRS Notice 2020-23 expanded the range of time-sensitive, tax-related actions, such as loan rollovers, whose completion can be delayed to July 15, 2020. Normally, in the event that a participant has a loan offset because of plan termination or severance from employment, a rollover generally must occur no later than the participant’s tax filing deadline, including extensions, for the tax year in which the offset occurred. If a participant’s loan is offset because of any other event, the participant has 60 days to roll over their loan into an IRA. As with other forms of relief provided by this notice, participants do not have to be affected by COVID-19 or its economic effects. Any loan rollover deadline that falls between April 1, 2020, and July 14, 2020, is extended to July 15, 2020.
