Seyfarth Synopsis: The IRS has issued some initial guidance on the coronavirus-related relief for retirement plans (and IRAs) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) in the form of Q&As on its website. Most of the Q&As address coronavirus-related distributions (“CV Distributions”), while one Q&A provides some IRS insight relating to the loan relief, referencing an old IRS Notice that answered questions about the loan relief issued after Hurricane Katrina. This blog post discusses the Q&A relating to the CARES Act loan relief. The Q&As related to the CV Distributions are discussed in a separate post.
Earlier this week, the IRS released Q&As on its website related to the loan relief provided under the CARES Act. These Q&As specifically state that the IRS intends to release additional guidance on this provision in the “near future,” which is anticipated to follow the principles of IRS Notice 2005-92, issued after the enactment of analogous relief legislation following Hurricane Katrina (“KETRA”). Given the similarity in the statutory language of the CARES Act and KETRA, we expect that will be the case.
As discussed in more detail in a prior post, in addition to increasing the amount that a “qualified individual” may borrow, the CARES Act also allows a qualified individual to delay certain repayments for plan loans outstanding on or after March 27, 2020. The specific language in the CARES Act provides that the due date for any loan repayment due during the period from March 27, 2020, until December 31, 2020 (the “Suspension Period”) may be delayed “for 1 year.” The language in the CARES Act also provides that the one year delay is disregarded for purposes of applying the maximum loan term (e.g., 5 years for a general purpose loan).
Many plan sponsors have opted to allow participants to suspend loan repayments otherwise due during the Suspension Period. However, there are several open questions with respect to what needs to happen at the end of the nine-month Suspension Period: When loan repayments recommence on January 1, 2021, is the loan re-amortized at that point to account for the suspension period? Or, is the loan not re-amortized until one year after the date payments were suspended? Is each suspended loan repayment separately delayed for one year? Or, is an additional year just added to the end of the original term of the loan?
In Q&A-8, the IRS sheds some light on what is supposed to happen at the end of the Suspension Period. First and foremost, the IRS refers back to the language in the CARES Act, reiterating that any repayment due during the Suspension Period may be delayed under the plan for up to one year. However, the IRS also refers us to section 5.B of Notice 2005-92.
The loan relief in the CARES Act tracks almost verbatim the loan relief provided under KETRA, with one primary difference – under KETRA, the suspension period was approximately 16 months, running from August 25, 2005 until December 31, 2006, which was longer than the nine month Suspension Period under the CARES Act. Notice 2005-92 provides a “safe harbor” for satisfying the loan suspension under KETRA. The Notice includes an example of the safe harbor, describing the administration of and calculations related to a loan taken by a qualified individual who suspends loan repayments three months after the start of the permissible suspension period.
In the example, the participant took a loan on March 31, 2005 to be repaid over the course of a 5-year period. The participant’s loan repayments were suspended for a 13-month period beginning on December 1, 2005 and ending on December 31, 2006. The example explains that in this scenario, loan repayments resume on January 1, 2007 and are re-amortized at that time to account for interest that accrued during the suspension period and to reflect repayment by April 30, 2011 (i.e., the original five-year term of the loan plus the participant’s 13 month suspension period).
While the example under Notice 2005-92 is not binding guidance for CARES Act loan suspensions, since the statutory language of the CARES Act is identical (other than the length of the suspension period) to the provisions of KETRA, the example from Notice 2005-92 offers a window into how the IRS will likely indicate that CARES Act loan suspensions should be administered. When applied to CARES Act loan suspensions, the example from Notice 2005-92 suggests the following:
- When loan repayments recommence on January 1, 2021, they are re-amortized at that time to account for the suspension period specific to each particular CV Loan; and
- The term of the participant’s loan is extended only by the period of time that loan repayments were actually suspended, and not by a year.
Despite the language in the CARES Act that extends the period for repayment of each suspended payment by one year, applying the safe harbor and example under Notice 2005-92, a participant will never be able to suspend repayments for one year, because the maximum Suspension Period is only nine months. Additional guidance from the IRS would be welcome, particularly in light of the contradictory language in the CARES Act stating that any repayment due during the Suspension Period may be delayed under the plan for up to one year (notwithstanding the same conflict between KETRA and Notice 2005-92). We eagerly await the promised additional guidance (and possibly even an example!).