This article is Part II of a series on coronavirus relief offered by the CARES Act, and focuses on plan loans. For information about coronavirus-related distributions, see Part I.
Section 2202(b) of the CARES Act adds increased availability of, and flexibility for, participant loans from qualified plans. Normally, IRC section 72(p) limits the amount of a loan to the lesser of $50,000, or 50% of a participant’s vested account balance, and requires that the loan be fully repaid within 5 years. Both of these limitations are relaxed by CARES.
Increased Limits
The maximum amount of a loan is increased to the lesser of $100,000, or 100% of a participant’s vested account balance. This only applies if both a) the participant is a qualified individual (see Part I for the definition of a qualified individual), and b) if the loan is made no later than September 23, 2020.
All other rules around the calculation of the maximum loan amount still apply. For example, the $100,000 is still reduced by the highest outstanding balance of all loans during the past year.
Delay of Repayments
For a qualified individual with an outstanding loan, any payment due between March 27, 2020 and December 31, 2020 is delayed by 1 year. Interest continues to accrue during this time. Any future payments after this period must be adjusted to reflect the delay and the additional interest. This delay may cause the overall term of the loan to extend beyond 5 years.
This applies to both loans which were already outstanding, and new loans made no later than December 31. This means that a new loan may be made with an overall term of 6 years, where the first payment is due in 1 year. Again this is only available to qualified individuals.
Plan Operations
An increase to the $100,000/100% limits is optional. If the plan sponsor wishes to provide the increased limits to qualified individuals, the loan program must be amended to allow for the increased limits. This amendment must be adopted retroactively no later than December 31, 2022 for calendar year plans. If the plan does not currently have a loan program, the plan must first be amended to allow loans. That amendment must be adopted before any loans may be made.
Many plans’ loan programs state that loan repayments will be made via payroll deduction. This helps keep the loan up-to-date while also making the process easy for participants. However in this environment where many participants are not currently receiving regular paychecks, or their pay may be much less than normal, sponsors may wish to consider making alternative payment options available. Participants may be permitted to make their loan payments via personal check or other arrangements. If this option is elected, the sponsor should be certain to amend their loan program, if necessary. The sponsor may also wish to allow terminated former participants to take loans. If so, the plan’s loan program should reflect that.
Plan sponsors should carefully consider the impacts of allowing increased loan limits before making any changes. While it is an easy way to get more money into participants’ hands at this difficult time, there can be serious consequences if the loan is not later repaid. This is especially true in pooled-account plans, where the loan is not just part of that one participant’s account, but is a general asset of the plan. If the plan allows for a loan equal to 100% of the participant’s account balance, and the participant later defaults on the loan, then it is possible that even a complete foreclosure of the participant’s account balance will be insufficient to repay the plan.
As always, please reach out to us if you want to discuss how these changes might impact your plan, or if you have any questions about your specific situation.
Part III, covering changes to the required minimum distribution requirements, will be coming soon!