COVID-19 Compliance Corner: New Loan Provisions Under the CARES Act

Each week, Carol Buckmann, with Cohen & Buckmann P.C., will explain legislative provisions or official guidance related to the COVID-19 pandemic that affect retirement plan sponsors.

The Coronavirus Aid, Relief and Economic Security (CARES) Act provides temporary relief from some plan loan requirements for loans made and repayments due beginning March 27. These provisions apply to qualified plans such as 401(k) and profit sharing plans, 403(b) plans and governmental 457(b) plans but, unlike the distribution provisions, do not apply to individual retirement accounts (IRAs). IRA owners are not allowed to take loans from their IRAs.

What Are the Basic Plan Loan Rules?

Plan loans are not treated as taxable plan distributions so long as they are within the Internal Revenue Code limits and are repaid with interest on a level basis over the loan term. While loans may be made from defined benefit (DB) pension plans as well as defined contribution (DC) plans, defined benefit plans do not usually provide for loans. Most 401(k) plans and many other defined contribution plans do.

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Loans are permitted under the “regular” rules if the total amount borrowed, including loans outstanding over the past 12 months, does not exceed the lesser of: $50,000 or  half of the participant’s vested account balance. The term may not exceed five years unless the loan is used to purchase a principal residence. When a participant fails to make a loan repayment on time, the loan is in default after any grace period has expired, and the entire outstanding principal plus accrued interest is subject to immediate taxation.

How Does the CARES Act Change These Rules?

The CARES Act permits, but does not require, plan sponsors to increase the amount that may be borrowed by “qualified individuals” and/or to delay certain loan repayments by “qualified individuals.” The provisions are effective during different time periods.

Who Is a Qualified Individual?

Like CARES Act distributions, the special loan rules apply to individuals if they or their spouse or tax dependent has been diagnosed with the coronavirus using a test approved by the Centers for Disease Control and Prevention (CDC) or if they have experienced COVID-19-related adverse financial consequences as a result of being quarantined, furloughed or laid off or having work hours reduced, or as a result of being unable to work due to lack of child care, or the closing or cutback in hours of a business owned or run by them. CARES Act loan provisions do not apply if the participant’s spouse or dependent rather than the participant suffers those adverse financial consequences. In that event, the spouse would have to qualify under the spouse’s plan. Other criteria may be added by the Secretary of the Treasury, but none have been added so far.

Special Relief

If permitted by their plans, “qualified individuals” may borrow up to a total of $100,000 or the value of the participant’s vested account balance, if less, during the period from March 27 to September 22. A participant with a $30,000 loan outstanding and a $150,000 vested account balance could be permitted to borrow an additional $70,000 under this CARES Act provision. A loan limit between $50,000 and $100,000 would also be permissible.

The CARES Act also permits an optional “one year delay” for each loan repayment due between March 27 and December 31. If a plan adopts this provision, a participant who could not make loan repayments during this period would not go into default or be subject to taxation. I put “one year delay” in quotes because, based on prior guidance issued by the IRS interpreting similar legislation, which the IRS recently advised us to consult, it appears that the maximum suspension period will actually be limited to nine months and that repayments may be required to commence again as of January 1, 2021. We await further guidance on that point. The period during which repayments were suspended is later added to the term of the loan and future payments must be adjusted to take into account interest accruing during the repayment suspension.  

Plan Sponsor Decisions Are Voluntary and Independent

IRS guidance indicates that plan sponsors can adopt either or both (or neither) of the CARES Act loan provisions regardless of whether they elect to provide the special CARES Act distributions discussed in last week’s column. However, plan sponsors should be careful to check the exact language in their plan documents because there may be an exception if the plan documents simply incorporate by reference the loan requirements in the Internal Revenue Code. Since the CARES Act amended those provisions, the new limits may have come into effect automatically under the plan’s language and plan sponsor action might be required to change them.

Implementation

Plan sponsors considering the new loan provisions should ascertain that their vendors and recordkeeper can administer them. This is particularly important if a loan limit between $50,000 and $100,000 is under consideration. Plan sponsors adopting the new loan rules should also communicate the availability of the loan relief to their participants. Due to the complexity of these rules, they may wish to have their ERISA [Employee Retirement Income Security Act] counsel review any communications.

Carol Buckmann is a co-founding partner of Cohen & Buckmann P.C. As a highly regarded employee benefits and ERISA [Employee Retirement Income Security Act] attorney, Buckmann deals with the foremost issues in ERISA, including pension plan compliance, fiduciary responsibilities and investment fund formation.

She has 40 years of practice in this area of the law and a depth of experience on complex pension law and fiduciary problems. She regularly shares her thoughts on new developments in the benefits industry on Insights, Cohen & Buckmann’s blog, and writes and speaks on ERISA topics. Buckmann has been recognized by Martindale-Hubbell as an AV Pre-eminent Rated Lawyer, was selected for inclusion in the Best Lawyers in America and was named one of the Super Lawyers in Employee Benefits.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.

SURVEY SAYS: Feeling Safe Returning to Work

PLANSPONSOR NEWSDash readers report how long it will take for them to feel safe returning to the office environment.

The COVID-19 pandemic has created a mostly remote workforce in the U.S.

Despite the relaxing of shelter-in-place orders and increase in safety measures, 64% of 2,000 U.S. employees surveyed by Citrix Systems say they would not feel comfortable returning to the office for one month or more.

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Last week, I asked NEWSDash readers, “Do you think some states are relaxing orders too soon, and when would you feel safe returning to the office to work?”

More than half of responding readers (58.73%) work in a plan sponsor role, 23.8% are recordkeepers/TPAs/investment consultants, 14.3% are advisers/consultants and 1.6% each are attorneys and CPAs.

Asked whether they think states are relaxing orders related to social distancing during the COVID-19 pandemic too soon, 42.2% of responding readers said yes, and 28.1% indicated they think some states are and others aren’t. More than one-quarter (26.6%) said they do not think states are relaxing orders too soon, and 3.1% said they don’t know.

One to two months was the most selected time frame for when respondents would feel safe returning to the office to work, with 23.4% selecting it. For 1.6%, it’s a moot point as they are always remote employees. Among those who are already working in their office, 17.2% reported they feel safe and 1.6% said they don’t.

Two to three months was the second most selected time frame (17.2%) for when respondents would feel safe returning to work, followed by more than six months (14.1%). Nearly one in 10 said they would feel safe sooner than one month, 7.8% selected three to four months, 1.6% chose four to five months, and 6.2% said five to six months.

The majority of responding readers who left comments relayed the actions they feel are necessary for them to return to the office environment. Some just say we should get back to work. A number of readers shared what their companies are doing for return-to-work strategies. Editor’s Choice goes to the reader who said, “In late March, I spent 3.5 days in the hospital with Influenza B. I don’t want to meet COVID19.” So glad that reader is feeling better.

A big thank you to all who participated in the survey!

Verbatim

Need a vaccine or effective treatment first!

I think it should be delegated to each state and that state should make it regional.

Social Distancing will need to be maintained. Our financial institution moved employees to other branch locations to accommodate this. Some locations are starting to wear masks when arriving and leaving work, leaving their offices so on and so on. Our branch lobbies continue to be closed to the public with only drive thru open. I’m afraid this will be the new normal for some time to come.

My company has already said we were not going to return any sooner than Labor Day and at that point, they may delay the return and/or decide to change staff to either partial or full remote to accommodate safe distancing for employees.

My employer requires everyone to go back to the office even though most of us have worked productively from home and the general feeling is that offices pose unnecessary risk. Employees who could not work from home are still employed and also will return.

Even when we are able to reopen the office, I don’t know that our public transportation will be able to support the workers or our office able to obtain sufficient supplies (masks, gloves, soap, disinfectant). Just because we CAN return to the office doesn’t mean we all SHOULD rush back to the office.

I would feel more comfortable returning to the office if everyone practiced good hygiene (staying home when sick, washing hands frequently, etc.), the cleaning staff actually cleaned all surfaces in the office, and offices reverse the “densification” trend. Until then, I think we are all working remotely for the long haul.

I’m not comfortable returning to the office until widespread testing is available.

I currently go to the office 2-3 times a week and feel very comfortable doing so. I feel that it should be up to each employee, however, on when they go in, if possible.

We might feel safer at home, but an airborne virus can get into our homes and apartments as easily as into our office buildings! Common sense precautions go a long way!

Governors are relaxing rules when they have not met CDC guidelines and with no plan in place to monitor infection and what steps they will take if infection rates move in the wrong direction.

Like the states, my organization is taking a ‘phased’ approach, bringing back small numbers of employees at first in a very organized fashion such as to maintain proper distancing in all areas and floors of the organization, as well as increasing cleaning/sanitizing of hi-touch areas. I feel comfortable about going back to work.

I believe workplace modifications, testing and contact tracing are important first steps before attempting a safe return to work.

My thought is that even if restrictions are relaxed, I have the choice of whether I stay home or not. I would need to see that others are following the guidelines, e.g. wear a mask, 6 feet distance, no crowds, etc. before I go out.

More structure is needed; return to work too quickly will likely result in another spike in COVID-19 cases. In the rush to “return to normal” we are seeing less social distancing and a lack of facial covering/protection, putting employers in the role of “the bad guy” just trying to maintain safety and jobs.

My company will not rush to bring people back to the office. Even when I do return to the office, I plan on wearing a mask for a good long-time before being fully comfortable. I’m concerned about a second-wave of infections if trying to get back to normal is rushed.

Working remotely is NOT an option for many people. Let’s get people back to work so our economy can begin to recover.

If working from home is working for both the employee and the organization, why rush getting back into the office environment? If the predictions that a second wave of the virus will occur in the fall of this year, why would we want to return to the office only to end up going back to the work from home environment so soon? Also, what about employees who are required to return to the office and then contract the virus – what type of liability does this create for the company? Is it worth the risk right now?

Until restrictions are lifted for our most vulnerable (i.e., nursing homes and hospitals), it’s not safe for anyone to be gathering.

Let adults be adults. It’s time to get everyone back to work. People can be smart in the workplace. The government isn’t your nanny.

I prefer that there is a vaccine known to be effective and readily available to all before returning to work.

I work in risk management and have an inherent bias, but I’m not interested in returning to the office until we have a vaccine, antibody testing, and/or understand what the long-term effects of this virus are.

I don’t know when I will feel comfortable. Too much remains to be seen. What does testing look like in a few months? And are we going to see spikes in cases where things opened too soon? We have opened states and activities without a real plan or consistency.

It is dangerously selfish to open up the economy until we have much broader testing, tracing, and follow up quarantining.

In late March, I spent 3.5 days in the hospital with Influenza B. I don’t want to meet COVID19.

Adequate measures need to be in place to ensure the safety of employees—revamped worked spaces, protective masks, temperature taking. It would be nice if we could wait until a vaccine is perfected, but that may many months.

I am enjoying my time at home and would prefer to have a safe environment, rather than an environment where we have to be at work, but people are getting antsy in their homes.

Without repeated testing of everyone, it’s impossible to know when anyone has been infected that we’re in contact with. Because so many don’t display symptoms, people generally tend to think it won’t affect them, so why can’t they get back to normal—restaurants, movies, clubs, parties, etc. In my opinion, people don’t have enough critical thinking skills anymore, to be able to see that their boredom does not equate to it being safe to mix and mingle just yet. Plus, we’ve become too impatient and can’t wait longer than two seconds for a computer image to appear, let alone two months to stay at home and sequester. I understand people need to earn money, and a lot of industries have revamped to be able to go online/be virtual/be less inclined to stand shoulder to shoulder within a business. I think this period is going to end up with vast changes to how we work and socialize. At least I hope it does.

I go to the office periodically and because I’m the only one there, I feel safe within our office area. But, I am more concerned when I am out in the common areas. I look at it like I did with 9-11. I refuse to live the rest of my life in fear, so although I take extra precautions, I am not as fanatical about it as some.

As long as people remain vigilant and cautious I think we will be fine. I have worked at my office all along. No visitors or sales people. We take temperatures and wipe down constantly. I wear a mask when out in public areas. I’m good with all of that.

I’m not scared. I know how to protect myself. The only reason that would make me pause is the mask requirement. I do not want to wear it around all day.

I’m concerned about returning to cubeville. Cold and flu spread every year in the petri dish of the office. I can’t imagine COVID would fare better.

I’d really never go back if given the option.

Understand that the State (our State Governor) is promoting guidelines based on information. It is the employer’s responsibility to use the direction to provide a safe work environment. It has always been the employer’s responsibility. The threats may change but your employer should invite you back to the office when they’ve secured a safe work environment…not when State officials relax restrictions. Be safe and well (and smart about your decisions).

My comfort level in returning to the workplace is dependent on the actions my employer takes to keep EE’s safe and how quickly they ramp up the number of EE’s allowed to return.

We have been able work remotely effectively. With fears of using mass transit, and schools, summer camps and daycare closed, there is no need to rush this.

588 people die every day, every year, from the regular flu, for which we have a vaccine. Quit obsessing over the number of cases. The more we test, the more cases. Let the truly vulnerable shelter in place. It’s time for the rest of us to get back to work…

 

NOTE: Responses reflect the opinions of individual readers and not necessarily the stance of Institutional Shareholder Services (ISS) or its affiliates.

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