CARES Act - Loan Provisions

[RatherBeGolfing]

12 minutes ago, Peter Gulia said:

Just curious, how long can the software makers wait before one must invent an answer to get the recordkeepers' computers ready?

Normally, they just say our system wont do it, get your TPA to give you a new amortization schedule

 

[Peter Gulia]

So how long can a super-smart TPA wait?

[RatherBeGolfing]

I already have amortization schedules ready using the safe harbor in 2005-92.  I know there are people here who vehemently disagree with the application of 2005-92 to CARES, but I think it is a common sense approach absent further guidance.   If new guidance says we can delay payments longer, then I have the option of extending the delay or keeping my current January repayment start date.  

[Albert F]

       Correct, I did my calculations like the bankers who make arm’s length loans. Correct, I used a standard amortization schedule. I assumed payments were made as of the end of each period, and that payments were made on January 31, February 29, March 31, and April 30.  I computed the principal balance as of April 30 to be $9,222.37 and then accrued interest for eight months until the next payment was made nine months later on January 31, 2021 rather than on May 31, 2020.  I did incorrectly describe $9,222.37 as the balance as of May 31, but the concept is more important than the precise number.  One could do similar calculations with payments on the first of the month, or whenever payroll payments are made.

The difficulty with the two alternatives that Mr. Richter and some of you have presented to the IRS approach set forth in [IRS Notice 2005-92, 2005-2 C.B. 1165, 1171-72 Example is that they contradict either the limit of suspensions to payments otherwise due in 2020 or the level amortization requirement of Code Section 72(p)(2)(C), both of which are set forth in the CARES Act..  I agree with Mr. Richter that “Participants need to understand the impact of the delay of repayments (a participant is not required to suspend repayments and could continue to make repayments on the loan).” It is the administrator’s fiduciary responsibility to give the participants and beneficiaries a notice describing that impact, which requires an explanation of how the borrower’s payments would change if the borrower decided to defer future payments.  It would be an invitation to litigation to fail give such an explanation.

[Luke Bailey]

Having reviewed the bill text again several times in light of all of the posts that have occurred on this topic, it seems to me now that the right answer is as follows. Unfortunately, part of the right answer is that there is no one "right answer":

1. Except in the case of loans that were near the end of their original term when the were suspended, payments restart on the first payment date that would otherwise have been a payment date for the loan on or after 1/1/2021, because 2202(b)(2)(A) says that the one-year delay is only for payments that would otherwise have been required before 1/1/2021. However, if, for example, the original loan term would have ended 3/31/2020, so that the only suspended payment is the 3/31/2020 payment, then that payment is not due until 3/31/2021, so in that case the loan would restart 3/31/2021. So if IRS wants to stick close to the statutory language and goes with 1/1/2021 as the basic rule for re-start date, it will need to make an exception for loans that were near the end of their term when they were suspended. But this is actually consistent with the statutory language, not a workaround for bad language. Section 2202(b)(2)(A) says you suspend payments due during the last 9 months and change of 2020 by one year, not that you restart after the 9-month and change period. In the case of a loan whose pre-Corona term would have ended 3/31/2020 and the last payment for which is now on 3/31/2021, no payments are due under the extension on or after 1/1/2021 until the loan's extended 3/31/2021 payment, because no payments were due on or after 1/1/2021 under the pre-Coronal loan.
2. It's undecidable on the text of 2202(b)(2)(C) whether you add one year (the one-year period by which payments are delayed) or the 9-month and change suspension period to the end of the loan, because 2202(b)(2)(C) refers to the "period" described in (A) and both the one-year and the 9 month and change periods are "described" in (A). Since payments are suspended only during the 9-month period, probably the stronger argument textually is that you add only 9 months. But either way you go (9 months or 12 months), you will need to make exceptions. For example, the last payment on a loan the 5-year term of which would, pre-Corona, have ended 12/31/2020, will need to be deferred to 12/31/2021, so in that case the loan will need to be extended by a full 12 months, even if you (i.e., the IRS) decides that the basic rule is going to be that terms are extended 9 months. And if you say that the basic extension is 12 months, then if the last pre-Corona payment for the loan would have been, say, 8/31/2020, then presumably the new loan term should end 8/31/2021. This is where you can start to get into really confusing territory, though, and I think is part of the confusion. Say, for example, the loan had 3 years to go as of 3/27/2020. If I only add 9 months to the loan term when it restarts on 1/1/2021, can I really say that I have delayed the remaining payments falling due in 2020 by 12 months? Probably, but it's confusing.
3. Almost certainly when payments start back up (whether in January, 2021, or later), the payments are the level amount that will pay off the loan during the period from the date of the first post-2020 payment through the end of the extended period, so you won't have a different payment amount for the first 3 months of 2021 than for the rest of the extended loan term. This is because 2202(b)(2)(B) says you adjust "any subsequent payments" with respect to the loan, not just the delayed payments, to take into account the delay. And of course, a single repayment amount whenever the loan restarts is much more sensible, so here the text of the statute and simplicity are in harmony.
4. You don't need to know the answers to these questions now, because the loan is simply suspended through at least 12/31/2020. $0 payments through the end of 2020 in all cases is simple.

[Luke Bailey]

In Notice 2020-50 the IRS took the elegant way out of the confusion created by the, dare I say it, gaps in CARES Act Section 2202(b)'s wording. It provides a safe harbor in the second paragraph of Section 5(B) of the Notice. You (obviously) suspend any payments otherwise required in 2020. Then, you restart in 2021, say with first payroll in 2021, or end of January or end of quarter. Whatever you would normally do. If the loan before suspension would have termed out after December 31, 2020, you simply add a year to the loan term. If it would have termed out earlier (e.g., November 30, 2020), you take it out to the anniversary of when it would have termed out, but for the suspension. In either case, you create a new amortization schedule with a single uniform, level payment amount from the restart date to the end of the new term. In the last paragraph of Section 5(B), the IRS acknowledges that "there may be additional, if more complex, ways to administer Section 2202(b) of the CARES Act," and lets you use those if you want, if consistent with the statute, but who would want?