On March 27, 2020 the President signed the Coronavirus, Aid, Relief, and Economic Security (CARES) Act into law. This legislation provides relief for those suffering financially and physically from the COVID-19 pandemic. With respect to retirement plans, the CARES Act provides targeted relief for plan participants who need access to their retirement plan funds through loans or distributions, waives required minimum distributions for the 2020 calendar year for most plans, and provides funding relief for employers who sponsor single-employer defined benefit plans.
This is the second in a series addressing questions most frequently being asked by 401(k) plan sponsors related to the CARES Act, specifically focusing on Participant Loans under the Act.
The CARES Act increased the maximum amount for participant loans to “qualified individuals” from the lesser of 50% of a participant’s vested account balance or $50,000 to 100% of a participant’s vested account balance up to $100,000. These new loan limits apply to loans made to qualified individuals from March 27, 2020 to September 23, 2020.
Additionally, the CARES Act permits suspension of loan payments due from March 27, 2020 through December 31, 2020 for new and existing plan loans for a period of up to a year for qualified individuals. Further, it allows for extension of the term of the loan for a period of up to a year, without violating the maximum 5-year term.
Who is a “qualified individual” for this purpose?
Qualified individuals are defined as any individual:
- who has been diagnosed with COVID-19, or whose spouse or dependent has been diagnosed
- who has experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, or having their hours reduced as a result of COVID-19
- who is unable to work due to lack of childcare resulting from COVID-19
- who owns or operates a business that is completely or partially closed as a result of COVID-19
- other factors as determined by the Secretary of Treasury
Is a plan required to provide for CARES Act loans?
No. This is an optional provision, not a required one.
Does a plan have to be amended before permitting CARES Act loans?
No. The provision can be implemented immediately like coronavirus-related distributions. The plan must adopt a conforming amendment no later than the last day of the plan year beginning after December 31, 2021 (December 31, 2022 for calendar year plans), unless extended by the IRS.
Can a participant take a CARES Act loan if he or she has been furloughed or laid off?
Yes. A qualified individual can take a plan loan under the CARES Act provisions if they have been furloughed or laid off as a result of COVID-19. Additionally, the CARES Act permits loan payments due from March 27, 2020 through December 31, 2020 to be suspended for a period of up to a year. This means that an eligible participant could receive a plan loan, and the payments could be immediately suspended.
Note that interest will accrue during the suspension period. Further, it would be permissible to extend the term of the loan for a period of up to one year without violating the maximum 5-year loan term.
Do existing participant loans have to be taken into consideration when determining the maximum amount available?
Yes. Under the CARES Act, the maximum loan is equal to the lesser of 100% of the participant’s vested account balance or $100,000. If a participant has (or has had) an existing loan, the plan still must consider the participant’s highest outstanding loan balance during the last 12 months for purposes of the $100,000 limit.
For example, assume a participant has a $300,000 account balance and that he or she has taken a $50,000 plan loan within the last 12 months. In that case, the maximum CARES Act loan would be $50,000 ($100,000 less $50,000).
Do participants have to provide certification that they are a qualified individual to receive a CARES Act loan?
Unclear. The CARES Act doesn’t specifically require participant certification for this purpose, although certification is required for coronavirus-related distributions. Hopefully, the IRS will issue guidance on this point, but absent that guidance, it would be prudent for plan sponsors to obtain certification.
After the suspension period, how will loan repayments be applied?
Unclear. The Act doesn’t specifically dictate how the suspended loan repayments coordinates with the “one-year” suspension period, whether the loans will be re-amortized, deductions will be doubled, or the repayment period will be extended past the original term. Hopefully, the IRS will issue guidance on this point before January 2021, but absent that guidance, it would be prudent for plan sponsors to re-amortize the note to the original term.
Important Note: It is expected the IRS and DOL will issue guidance with respect to the provisions of the CARES Act, as well as other retirement plan-related matters that were not addressed in the Act. It is also possible Congress will pass additional legislation, so the situation remains fluid.
Note: this is the second in EJReynolds’ series on the CARES Act . To see the first in this series “FAQ’s from Plan Sponsor regarding the CARES Act Coronavirus-related distributions”: PLEASE CLICK
As regulations and further legislation is passed, EJReynolds will keep you informed and up to date. We are taking all necessary precautions and monitoring the situations, but we are here for you and want to assure you we will continue to provide the level of service you have come to expect. We hope you, your families and circle of friends are and remain healthy. We will get through this, one day at a time.