3959 / What relief did the CARES Act provide to expand the availability of qualified plan loans in response to COVID-19?

The CARES Act relaxed the rules to provide relief for qualified plan participants with existing plan loans in 2020 (the COVID-related relief was not extended into 2021). If a participant had an existing plan loan with a repayment obligation falling between March 27 and December 31, 2020, that repayment obligation was extended for one year. Any subsequent repayment obligations were then adjusted to reflect this extension. For plan participants who are “qualifying individuals,” the plan loan limits were increased to the greater of $100,000 or 100 percent of the vested balance in the participant’s account.

Qualifying individuals are individuals (1) diagnosed with COVID-19, (2) whose spouse or dependent were diagnosed with COVID-19, or (3) who experienced adverse financial consequences as a result of (i) being quarantined, furloughed or laid off (or having work hours reduced) due to COVID-19, (ii) being unable to work due to lack of child care due to COVID-19, (iii) closing or reducing hours of a business owned or operated by the individual due to COVID-19, or (iv) other factors as determined by the Treasury.¹

Later IRS guidance expanded the list of qualifying individuals to include anyone whose pay was reduced due to COVID-19 (regardless of whether hours were reduced or whether the individual was laid off). If a taxpayer was planning to start a new job and the start date was pushed back (or the offer was rescinded entirely) due to COVID-19, that taxpayer also qualified for relief. Further, if a spouse or member of the plan participant’s household suffered one of the effects described above, the participant was eligible for the expanded retirement account access.² “Members of the participant’s household” was interpreted to include roommates or anyone who shares the participant’s primary residence. For example, if the participant’s live-in partner owned a business that was shut down due to COVID-19, the participant was eligible for the plan distribution relief.

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Planning Point: Despite the increased loan limits during disasters, plan sponsors must remember the one-year lookback rule. In reality, the $100,000 limit is reduced by (a) the excess of the employee’s highest outstanding plan loan balance during the one-year period ending on the day before the loan is made, over (b) the employee’s outstanding balance of any plan loan on the date the loan is made (this calculation also includes loans from any other plans maintained by the employer or member of a controlled group).

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The IRS also released Q&A guidance on the CARES Act retirement-related provisions. The IRS confirmed that plan sponsors could look to past guidance issued in response to Hurricane Katrina in 2005 and the RMD waiver in 2009 for help implementing the CARES Act provisions.

IRS Q&A clarified that increased loan limits were available between March 27, 2020 and December 31, 2020. Further, the loan and distribution relief was optional for plan sponsors—and sponsors could elect to adopt one provision and not another (including the loan repayment option). Plan sponsors could rely on the participant’s certifications that they were eligible for the relief. COVID-19 related distributions are reported on Form 1099-R (even if the distribution was repaid in the same year).³

The IRS confirmed that the plan loan or hardship distribution amount did not have to directly correspond to the participant’s financial losses. As a result, plan sponsors did not have to obtain documentation to substantiate the amount of the financial hardship and plan participants did not have to prove the amount of their loss.⁴

The expanded plan loan and hardship withdrawal options were completely optional for plan sponsors. However, IRS Notice 2020-50 clarified that plan participants were eligible to claim the tax benefits regardless of whether the plan sponsor opted to amend the plan in accordance with the CARES Act relief options.

If the plan allowed delayed repayment for outstanding loans as of March 27, 2020, the payments could be deferred until 2021 with the remaining amounts re-amortized beginning with the first payment date after January 1, 2021. The re-amortization period began January 1, 2021 and runs through the date that is one year after the loan was originally due. The re-amortization period will begin January 1, 2021 and run through the date that is one year after the loan was originally due.

IRS guidance also notes that there may be other reasonable methods to handle the loan repayment deferral. For example, the plan could resume loan repayments according to the loan recipient’s original amortization schedule. The plan could then re-amortize the principal and accrued interest as of the anniversary date when the first loan repayment was paused.