Terminated Participant - Loan extended due to COVID

[Vlad401k]

A participant terminated employment due to COVID at the end of March. She has a loan outstanding and wants to take a full distribution. Once the full distribution is processed, should the loan be offset? I realize that for regular distributions, the loan would be offset once a full distribution is taken. However, can she freeze the loan until 12/31/2020 because she was affected by COVID?

 

Thanks,

[Bird]

I think you have to look at your loan policy very carefully, and consider what amendments to the plan and the policy you will be making.  I'd be inclined to offset the loan and just be careful to sync that action with the documents.

[G8Rs]

It might not be a loan policy issue. If the plan only allows lump sum distributions,  then you distribute the entire account. That means the note is offset. Not because a payment was due - rather because she effectively received a distribution of the note (which extinguishes the note). 
 

If she is allowed to take a partial distribution then the note can stay in the plan. And then the plan could extend the due date for the covered repayments. We don’t know if the plan must offer her the ability to extend the repayments as that part of the law isn’t clear. 

[Luke Bailey]

Although plan documents and the amendments you ultimately adopt are/will be an important part of this, and require attention before you take any action, the law may permit either a suspension or a loan offset. Most likely the loan offset would be more favorable to the participant for a variety of reasons, assuming the loan offset could be treated as a COVID-19-related distribution eligible for the no pre-59-1/2/three-year income spread/rollover rule. But if the pareticipant's total account balance (including loan) exceeds $100,000 and he or she will need more than $100k in the crisis, or perceives need to do so, would need to think through his/her decision. A lot of this is subject to uncertainty because of CARES Act language and lack (as of today) of guidance, but you likely have options and will need to decide on them. Note that if your plan only provides for a single distribution to terminated participant, the participant might have to take that to get the loan offset. A full discussion of the CARES Act loan provision uncertainties and the relationship of the loan rules with CARES Act distribution rules (both of which require the participant to be affected by the COVID-19 crisis in  a defined way) is here:

 

[ESOP Guy]

You might want to read the loan note.  Back when I was doing 401(k) plans almost all our notes said the loan was payable upon termination.     That note is a contract subject to contract law not pension law.   I think you have to ask yourself can the plan allow that contract be ignored if the note has such a provision?  

[Luke Bailey]

28 minutes ago, ESOP Guy said:

You might want to read the loan note.  Back when I was doing 401(k) plans almost all our notes said the loan was payable upon termination.     That note is a contract subject to contract law not pension law.   I think you have to ask yourself can the plan allow that contract be ignored if the note has such a provision?  

ESOP Guy, the obligee on the note is the plan and it has the right to renegotiate it at any time and to any extent, the only guardrails being IRC sec. 72(p) if you want to avoid taxable distribution, which was amended for this as part of CARES Act, and DOL regs, which of course need adjustment for CARES loan rules, and presumably will get that needed adjustment. The only other conceivable restraint on renegotiation would be the trustee's or plan administrator's fiduciary duty, but since it is the participant's self-directed (presumably) account that serves as loan collateral, there should be no fiduciary issue either.