California Gov. Gavin Newsom (D) has approved legislation that conforms to federal law temporarily raising the cap on retirement plan loans for people affected by the pandemic.
A.B. 276, signed by Newsom on September 11, conforms California’s tax code to provisions of the federal Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) that temporarily increase for COVID-19-affected taxpayers the maximum tax-free loan amount that they are allowed to take from employer-sponsored qualified retirement plans, from $50,000 to $100,000.
The bill would also align the state to a provision allowing some COVID-19-affected taxpayers with an outstanding retirement plan loan to delay repayments up to a year.
The CARES Act provided a variety of coronavirus relief measures, including increasing the maximum amount that workers are allowed to borrow from their employer-sponsored retirement plans without having to pay taxes or penalties. However, California doesn’t automatically conform to the CARES Act language raising the cap, so without A.B. 276, if a taxpayer borrows $100,000, half of that amount would be viewed as a distribution under state law and subject to state income tax and the early withdrawal penalty, according to an August 31 staff analysis of the bill.
Under A.B. 276, taxpayers’ loans up to $100,000 will be exempted under state law as well as federal law if the loan conditions are honored. Notably, employers are not obliged to offer retirement plan loans up to $100,000 to employees, but A.B. 276 protects workers from tax penalties in the event that they do.
Assembly member Laura Friedman (D), the bill's author, said it “will protect California citizens who, faced with economic hardship due to the Covid-19 pandemic, take a loan from their employer-sponsored qualified retirement plan to support themselves and their families.”
A.B. 276 was approved unanimously by the State Legislature August 30 and was sent to Newsom on September 8. The governor previously signed another bill, A.B. 1577, that conforms the state tax code to CARES Act treatment of forgiven Paycheck Protection Program loans, excluding them from being treated as taxable income.