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Key Details Missing as People Consider New Retirement Plan Loans

Posted on Apr. 29, 2020

When retirement plan loans should be repaid is just one of several questions practitioners have about the loan provisions that were part of coronavirus relief legislation.

The first loan repayment could be due in January 2021 despite the one-year suspension period in the statute, Susan Wright of Wolters Kluwer said April 28 during a webinar hosted by her firm.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), which President Trump signed into law March 27, increased the maximum amount available for a plan loan to $100,000. It also included a provision that “qualified individuals” can delay plan loan repayments for one year that are due between March 27 and December 31.

Wright said it’s not clear how the one-year suspension period applies, and that guidance is needed from the IRS.

“If it were treated similarly to loans under [Hurricane] Katrina, it appears that the first loan repayments would be due January 2021, and that you would perhaps re-amortize the loan balance at that point in time taking into consideration loan payments that were suspended as well as any accrued interest that happened during the suspension period,” Wright said, adding that the re-amortization issue is another area where guidance is sorely needed.

Plan Amendments, Participant Certifications

Another question is whether plans that have no loan provision must be amended to first permit loans before permitting CARES Act loans. Wright said it appears this isn’t necessary but added that practitioners have differing points of view on the issue.

Plan administrators might also be able to obtain a certification from the plan participant that they are a qualified individual for loan purposes, but that also needs clarification, Wright said. A qualified individual includes someone who is diagnosed with COVID-19 or whose spouse or dependent is diagnosed, or someone who has experienced specified adverse financial consequences.

The CARES Act contains a separate provision that allows distributions of up to $100,000 to qualified individuals without imposing the normal early withdrawal penalty under section 72(t), and the certification requirements for the distribution provision are clearer.

The law specifically states that for distributions, the plan administrator can rely on the participant’s certification that they are qualified, but the loan provision doesn’t include that language, Wright said. However, she said it’s likely the IRS would extend the same rule to loans.

Wright also said it appears that the $100,000 limit for plan loans must be reduced by the employee’s highest outstanding loan balance in the last 12 months.

Guidance is also needed on the distribution provision, Wright said, including whether plans have to permit the distributions to be repaid. She said it appears that if a participant repays the distribution, it doesn’t have to be repaid in full and could be repaid in multiple payments.

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