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Industry Intel > CARES Act – Optional or Required? Part 2 - Loans

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CARES Act – Optional or Required? Part 2 - Loans

A common question regarding the CARES Act distribution, loan and required minimum distribution (RMD) waiver provisions[i] is whether these provisions are optional or mandatory. In most cases, they are optional – but in the retirement world there are very few questions where a short answer will suffice.

Remember that, if allowed by the plan, a qualifying individual[ii] may take a plan loan up to the lesser of $100,000 or 100% of the participant’s vested account balance. This only applies to loans made on or before Sept. 23, 2020 (180 days following enactment of CARES).

Remember also that a plan is not required to permit loans up to these increased limits for qualifying individuals. The law seems clear on this point. What is not clear is whether the 1-year extension of the due date of a loan is optional. There is good reason for this confusion.

The CARES Act provides that if the due date of a loan falls between March 27, 2020 (the date of enactment), and December 31, 2020, then the due date “shall” be extended for 1 year. On its face, this reads that it is mandatory. While a plan is not required to permit loans, if it does, then this would indicate that the extension is mandatory, even though a participant might not want that result. 

Consider; what if a participant wants the loan to be defaulted in order to have it treated as a COVID-19 distribution - where there would be no 10% additional tax, taxes can be paid over 3 years and there is a 3-year repayment period? If the extension is mandatory then how can a participant elect to have the plan treat a loan as being in default - and thus taxable - where the law mandates that it is not a taxable event?   

Consider also that in IRS Notice 2005-92, the IRS, when interpreting this same provision in the Katrina Emergency Tax Relief Act of 2005 (KETRA), stated that the provisions is optional (emphasis added): 

B. Suspension of payments and extension of term of loan. A special rule applies if a qualified individual has an outstanding loan from a qualified employer plan on or after August 25, 2005. Section 103(b) of KETRA provides that, for purposes of § 72(p), in the case of a qualified individual with a loan from a qualified employer plan outstanding on or after August 25, 2005, if the due date for any repayment with respect to the loan occurs during the period beginning on August 25, 2005, and ending on December 31, 2006, such due date shall be delayed for one year. In addition, any subsequent repayments for the loan shall be appropriately adjusted to reflect the delay and any interest accruing for such delay, and the period of delay shall be disregarded in determining the 5-year period and the term of the loan under § 72(p)(2)(B) and (C). Thus, an employer is permitted to choose to allow this delay in loan repayments under its plan with respect to a qualified individual, and, as a result, there will not be a deemed distribution to the individual under § 72(p).

Can we rely on this interpretation? It’s only an IRS Notice and the IRS can’t change the law. Unfortunately this is a quagmire of sorts – one on which we hope to get confirmation or clarification from the IRS on the application of this provision.

Robert M. Richter, J.D., LL.M, is the American Retirement Association’s Retirement Education Counsel. He is the editor of the ERISA Outline Book.

ICYMI: CARES Act—Optional or Required? Part 1—Distributions 

[i] Sections 2022, 2023 and 2024 of the CARES Act. This article does not explain the details of these provisions.

[ii] A qualifying individual is defined as someone: 1. who Is diagnosed with the virus (via test approved by CDC), 2. whose spouse or dependent is diagnosed with virus, or 3. who experiences adverse financial consequences as a result of:

  • quarantine
  • furlough
  • laid off
  • hours reduced
  • unable to work due to childcare
  • closing of business
  • or other factors as determined by the Secretary of the Treasury

The plan may rely on participant certification that those condition(s) are met.