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Guidance Sought on Re-amortizing Retirement Plan Loans

Posted on Apr. 16, 2020

Retirement plan sponsors may need clarification on how to handle delaying plan loan repayments under coronavirus relief legislation.

“The re-amortization is where people are a little confused, and we’re going to need some guidance from the IRS,” Stephen W. Forbes of Forbes Retirement Plan Consulting said April 15 during a webinar hosted by the American Society of Pension Professionals and Actuaries.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), which President Trump signed into law March 27, made several changes to retirement plans. One provision provides that “qualified individuals” can delay for one year plan loan repayments that are due between March 27 and December 31. Interest would continue to accrue during the delay.

Subsequent repayments and applicable interest would be re-amortized under the statute, but Forbes said there are many questions about how this should work. In the absence of new guidance, Forbes said practitioners could look to Notice 2005-92, 2005-2 C.B. 1165, which provides a framework from the last time the IRS delayed payments, following Hurricane Katrina. The notice provides a safe harbor for how to re-amortize a loan after a delay, he noted.

Forbes said there’s a good chance the IRS will follow the same approach in new guidance, but there’s no guarantee.

Who’s Qualified?

There are also questions about who constitutes a qualified individual under the law, Forbes said.

Under the CARES Act plan loan provisions, a qualified individual includes someone who is diagnosed with COVID-19 or whose spouse or dependent is diagnosed with it. Others that also qualify under the provisions include someone 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 (or the Secretary’s delegate).”

Forbes noted, however, that if an individual has a reduction in salary but not in hours, it doesn’t appear that they qualify under the current definition. “That doesn’t seem fair, and we may see some clarification” in which the IRS could expand the definition, he added. 

Forbes said that plan administrators can rely on an employee’s certification that they meet the requirements of a qualified individual.

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