Clarification of Loan Repayment Delay Provisions of CARES Act

“We sponsor a 403(b) plan and have adopted the loan repayment delay provisions of the CARES Act. Our recordkeeper has informed us that the one-year extension on loan repayments due from March 27 to December 31 only applies to “qualified individuals” affected by COVID-19 as defined under the Act. However, I was looking at the recent IRS Q&A and there was no mention of such repayment delay being restricted to “qualified individuals.” Does this mean that the loan repayment delay can apply to ALL participants, not just those affected by COVID-19?”

Stacey Bradford, Charles Filips, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

No, but we can easily see how you could be confused given the latest flurry of IRS CARES Act guidance! The original CARES Act language (section 2202(b)) is fairly straightforward on this issue, as follows (boldface text reflect the Experts point of emphasis):

(2) DELAY OF REPAYMENT.—In the case of a qualified individual with an outstanding loan (on or after the date of the enactment of this Act) from a qualified employer plan (as defined in section 72(p)(4) of the Internal Revenue Code of 1986)—

(A) if the due date pursuant to subparagraph (B) or (C) of section 72(p)(2) of such Code for any repayment with respect to such loan occurs during the period beginning on the date of the enactment of this Act and ending on December 31, 2020, such due date shall be delayed for 1 year,

(B) any subsequent repayments with respect to any such loan shall be appropriately adjusted to reflect the delay in the due date under subparagraph (A) and any interest accruing during such delay, and

(C) in determining the 5-year period and the term of a loan under subparagraph (B) or (C) of section 72(p)(2) of such Code, the period described in subparagraph (A) of this paragraph shall be disregarded.

(3) QUALIFIED INDIVIDUAL.—For purposes of this subsection, the term “qualified individual” means any individual who is described in subsection (a)(4)(A)(ii).

“Subsection (a)(4)(A)(ii)” is the CARES Act definition of those directly affected by COVID-19, so it is clear from the CARES Act that this is NOT a provision that would apply to all participants with outstanding loans.

Having said that, the Experts can clearly see how you would have been confused by the IRS Q&A (specifically, Q&A #8) since there is no mention of “qualified individual” under the Q&A:

Q8. What plan loan relief is provided under section 2202 of the CARES Act?

A8. Section 2202 of the CARES Act permits an additional year for repayment of loans from eligible retirement plans (not including IRAs) and relaxes limits on loans.

• Certain loan repayments may be delayed for one year: If a loan is outstanding on or after March 27, 2020, and any repayment on the loan is due from March 27, 2020, to December 31, 2020, that due date may be delayed under the plan for up to one year. Any payments after the suspension period will be adjusted to reflect the delay and any interest accruing during the delay. See section 5.B of Notice 2005-92.
• Loan limit may be increased: The CARES Act also permits employers to increase the maximum loan amount available to qualified individuals. For plan loans made to a qualified individual from March 27, 2020, to September 22, 2020, the limit may be increased up to the lesser of: (1) $100,000 (minus outstanding plan loans of the individual), or (2) the individual’s vested benefit under the plan. See section 5.A of Notice 2005-92.

It is particularly odd here that the IRS mentions that “qualified individuals” can increase their loan limits under the CARES Act (if the plan sponsor permits), but makes no similar reference regarding loan repayments, implying that it was NOT a simple oversight, but an intentional omission.

Fortunately, the IRS cleared up this conflicting language with the recent issuance of Notice 2020-50, which clarifies this issue (again the boldface text reflects the Experts’ emphasis):

A special rule applies if a qualified individual has an outstanding loan from a qualified employer plan on or after March 27, 2020. Section 2202(b)(2) of the CARES Act 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 March 27, 2020, if the due date pursuant to § 72(p)(2)(B) or (C) for any repayment with respect to the loan occurs during the period beginning on March 27, 2020, and ending on December 31, 2020, the due date shall be delayed for 1 year.

Thus it appears quite clear now that only “qualified individuals” affected by COVID-19 as defined under the CARES Act would be eligible for the loan repayment delay and NOT all participants.

However, please note that there is some limited loan repayment relief available to ALL participants in 2020, whether affected by COVID-19 or not. Notice 2020-23 provides limited relief for those payments where the either the due date or the expiration of any cure period for a late repayment falls between April 1 and July 14.  In such case, the due date, or end of the cure period, as applicable, could be delayed to July 15.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.