Plan Loans - amid COVID-19

[msmith]

Are new Plan loans permissible if the participant has been furloughed/laid off; and the Loan Agreement states that Payroll Deduction of the Loan Payment is required?

 

How is everyone handling this? I 

[EBECatty]

If I'm reading it correctly, the CARES Act working its way through Congress now would defer loan payments for a year, possibly avoiding the issue altogether. 

[msmith]

I read that as well - but am questioning whether or not it will apply to loans not yet made.

[EBECatty]

That section starts: "In the case of a qualified individual with an outstanding loan (on or after the date of the enactment of this Act)..." suggesting that even new loans (i.e., those not outstanding "on" the date of enactment, but outstanding "after" the date of enactment) would be covered as well. Deferring payments on new loans would also seem to further the goal of letting participants access the funds now (when needed) as opposed to solely providing relief for pre-existing loans. 

[Larry Starr]

24 minutes ago, EBECatty said:

That section starts: "In the case of a qualified individual with an outstanding loan (on or after the date of the enactment of this Act)..." suggesting that even new loans (i.e., those not outstanding "on" the date of enactment, but outstanding "after" the date of enactment) would be covered as well. Deferring payments on new loans would also seem to further the goal of letting participants access the funds now (when needed) as opposed to solely providing relief for pre-existing loans. 

I disagree, but admit someday we might get a ruling otherwise.  If an employee does not have payroll, I think it is a violation of your loan policy to make a loan KNOWING that there is no ability to comply with the procedure.  We just dealt with this (of course, the legislation is still just a bill, not a law). And a couple of things that no one has mentioned.

First, this only applies to loans made in the first 180 days following the enactment of the law.

Second, it only applies to qualified individuals, not all loans:

What's a qualified individual?
 

(ii) to an individual—

(I) who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention,

(II) whose spouse or dependent (as defined in section 152 of the Internal Revenue Code of 1986) is diagnosed with such virus or disease by such a test, or

(III) who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury (or the Secretary's delegate).

I think if you want to make a loan to an individual who fits the description but has no payroll, you need to amend your loan policies to account for someone who has no payroll but meets this definition.  Again, we might get more guidance someday.......

[EBECatty]

Fair enough. Our Relius loan policy says "Generally, the Administrator will require that the Participant repay the loan by agreeing to payroll deduction."

I do think the OP is describing a "qualified individual" as a participant who has been furloughed/laid off. Presumably they are suffering adverse financial consequences and could represent as much to the plan administrator. 

Even with stricter language in the loan policy, I think there's a reasonable argument to be made that repayment still must (and can) be accomplished by means of payroll deduction. The fact that they don't have any payroll currently does not mean they will not have any payroll a year later when the first payment is due. In other words, it's not impossible to comply with the loan policy at the time repayments are actually required. 

Either way, I suppose there's no harm in amending the policy to address specifically.

[msmith]

I completely agree with Larry's opinion. However, I hope this is addressed by future guidance.

[austin3515]

We have concluded that people can take loans while on leave/furlough.  They are on leave so no payments are due for 1 year.  They are on furlough and consuidered active so the employer expects them to have pay in the future, certainly within a year.  And those payments, pursuant to the loan program, will be made via payroll deduction.

You are eiother terminated (and eligible to close your account) or you are active (and eligible for in-service distributions and loans).  There is not some third state in the middle.  These furloughed people are no less a participant than any other participant who happens to be fortunate enough to receive a paycheck.

[RatherBeGolfing]

4 hours ago, austin3515 said:

We have concluded that people can take loans while on leave/furlough.  They are on leave so no payments are due for 1 year.  They are on furlough and consuidered active so the employer expects them to have pay in the future, certainly within a year.  And those payments, pursuant to the loan program, will be made via payroll deduction.

You are eiother terminated (and eligible to close your account) or you are active (and eligible for in-service distributions and loans).  There is not some third state in the middle.  These furloughed people are no less a participant than any other participant who happens to be fortunate enough to receive a paycheck.

We are taking the same position.

The waters can be a bit muddy when it comes to laid off or furloughed though.

[Larry Starr]

On 3/28/2020 at 10:52 AM, austin3515 said:

We have concluded that people can take loans while on leave/furlough.  They are on leave so no payments are due for 1 year.  They are on furlough and considered active so the employer expects them to have pay in the future, certainly within a year.  And those payments, pursuant to the loan program, will be made via payroll deduction.

You are either terminated (and eligible to close your account) or you are active (and eligible for in-service distributions and loans).  There is not some third state in the middle.  These furloughed people are no less a participant than any other participant who happens to be fortunate enough to receive a paycheck.

There certainly can be some "third state".  Here are the THREE categories (historically):

1. terminated (and will be paid AFTER the year is over and the valuation is done);
2. employed with ongoing compensation for loan repayments and therefore eligible for loans;
3. "employed' but on leave of absence/furlough and NOT eligible for loan because not currently being paid. 

The question is whether we should change our procedure with this new one year loan repayment option.  Until our plans are amended to incorporate an allowance for a loan for someone who would qualify for the one year deferral at the time of the loan, we just won't be using that interpretation.  But your mileage may differ!

[shERPA]

On 3/26/2020 at 12:26 PM, Larry Starr said:

I think if you want to make a loan to an individual who fits the description but has no payroll, you need to amend your loan policies to account for someone who has no payroll but meets this definition.  Again, we might get more guidance someday.......

Agreed an amendment would be needed assuming the loan program does not already so provide, but wouldn't the timing of this amendment be covered by the deferred amendment date in CARES?

Also, it appears that a qualified individual can take both a $100K in-service distribution and a $100K loan?

[mctoe]

Does anyone know if a plan sponsor is required to offer this new loan feature.  I believe the $100,000 coronavirus-related distribution is optional for plan sponsors.  Thank you.  

[C. B. Zeller]

Plans are not required to offer loans in the first place, CARES doesn't change that. It increases the maximum amount of a loan that can satisfy 72(p) but plans which offer loans are currently free to use lower limits than those stated in 72(p) so I don't believe you would be required to increase to the new maximums.

[Kansas401k]

If anyone answered SHERPA's second question, I missed it.  I cannot find anything in what I have read and heard so far that prohibits a participant with an adequate balance from taking both the $100,000 loan and a $100,000 distribution, with the distribution being either from an IRA or a QRP. This is of course assuming that the Plan Sponsor adopted both provisions.

[austin3515]

you can definitely do both.  Ther is no connection between the two limitations at all.  Remember the loan is not a withdrawal anyway.

[Kansas401k]

Thanks for the confirm, austin3515. That was the conclusion that I arrived at.