CARES Act - Loan Extension - Does "One Year" Really Mean 9 Months?

[CMC]

After reviewing the KETRA safe harbor guidance in IRS Notice 2005-92, it seems that, as a practical matter, the "one year" delay permitted under the CARES Act winds up as a practical matter to be more like 9 months.   But for the difference in the period of time for which payments can be suspended (August 25, 2005 to December 31, 2006 in the case of KETRA vs. March 27, 2020 to December 31, 2020 in the case of CARES), the loan repayment relief is formulated in exactly the same way – both call for the due dates of any payments occurring during the specified period to be delayed “for one year.”  In the example in 2005-29, the participant ultimately ceases making any payments for more than one year, but that seems to be a function of the fact that the employer in the example acted to take advantage of loan repayment suspension for 13 of the 16-ish months such relief was available under KETRA, rather than the fact the suspension is described in KETRA as being delayed “for one year.”  (The implication is that if the employer in the example had waited until sometime in 2006 to act, the participant would have had his or her payments suspended for less than 12 months.)  In the text of the 2005-92, the Service indicates that as part of the safe harbor approach “loan repayments must resume upon the end of the suspension period….”  Consistent with that, in the example, loan payments resume on January 1, 2007.   Consequently, I'm thinking in the case of a CARES Act loan extension, loan repayments would resume in January of 2021.  Meaning participants, at most, would have gotten a 9-month break on repayments.  Does that seem right or am I missing something?

[Bird]

This has been debated pretty thoroughly here and you have summarized it well.  It's not settled.

I'm in the camp that says if you look to KETRA and Notice 2005-92 you are overthinking it; the difference in the time frame makes it an invalid reference.

Others think differently and say the suspension period ends 12/31/20.

[Luke Bailey]

Bird is correct, this has been hotly debated. All we know from the statute (i.e., what seems to be so clear in the statutory language that the IRS likely cannot gloss over it) is that for a pre-COVID loan that would have had a payment coming due in January of 2021, the loan will have to restart in January of 2021, because the payment suspension period will then be over. The span of time by which the loan gets extended is the harder part, because one part of the statute talks about suspended payments being delayed for 12 months, and another part talks about adding a period to the end of the loan that could be either the 9-month suspension period or the 12-month payment extension period. It seems to me that if, for example, a loan had a payment that would have been due 12/31/2020, and that was the last pre-COVID scheduled payment, then the loan would have to be extended by 12 months to honor the statutory language that the payments suspended during the period from enactment through the end of 2020 are extended by one year. But suppose the loan's last scheduled payment was 12/31/2022. The 12/31/2020 payment is arguably (although it seems to me a weak argument) delayed by a year even if you only extend the loan's term by 9 months, because the date when the 12/31/2020 payment is ultimately made gets lost in the reamortized payments. And what do you do with a loan that pre-COVID would have termed out 9/30/2020, in other words, a loan where the statute's statement that the loan is suspended only through the end of 2020 comes into direct conflict with the command that the suspended payments are delayed for one year. My guess is, it probably restarts on the anniversary of the first suspnded payment (e.g., 3/31/2021) and is extended to 9/30/2021. But it's not really apparent on face of statute what you do in these cases.

[JRN]

FWIW, Fidelity and other large record-keepers are extending the loan due date not by one year, but by the period of loan suspension.

[Luke Bailey]

So JRN, two things. First, no one is doing anything for real until 2021, because for now there are just no payments on a qualifying loan, period,

Second, would you agree that if my loan would pre-COVID have termed out on 12/31/2020, and now it restarts on 1/1/2021 and it terms out on 9/30/2021, that seems inconsistent with the statute's command to extend each payment by one year?

[Mike Preston]

13 minutes ago, Luke Bailey said:

So JRN, two things. First, no one is doing anything for real until 2021, because for now there are just no payments on a qualifying loan, period,

Second, would you agree that if my loan would pre-COVID have termed out on 12/31/2020, and now it restarts on 1/1/2021 and it terms out on 9/30/2021, that seems inconsistent with the statute's command to extend each payment by one year?

In addition, just to add some complexity, if a pre-COVID loan would have termed out sooner than New Year's day 2021 *OR*, even if it wouldn't have, coupled with a desire of the part of the participant to skip less than the maximum number of payments, can a plan sponsor limit the COVID program to force skipping all payments that are skippable?

[RatherBeGolfing]

15 hours ago, Luke Bailey said:

Second, would you agree that if my loan would pre-COVID have termed out on 12/31/2020, and now it restarts on 1/1/2021 and it terms out on 9/30/2021, that seems inconsistent with the statute's command to extend each payment by one year?

Luke, in your example, I don't think you have to restart on 1/1/2021.  Scheduled loan payments would restart on 1/1/2021, but you don't have any payments scheduled for Jan 2021.  Your first loan payment of 2021 would be your first delayed loan payment.  So lets assume you suspended monthly payments starting with the 3/31/2020 payment.  Your first payment would be 3/31/2021.  The statute does not say "no loan payments for one year", it says "these loan payments are delayed for a year".  Restarting regular scheduled payments as of 1/1/2021, and restarting the delayed payments after one year of suspension, is consistent with the statutory language.

[Bird]

And just for the record, if anyone hasn't been following, those of us who think that all repayments are pushed back think so because, well, the law seems to say that.  "Any subsequent repayments...shall be appropriately adjusted."  I'm not looking for a discussion but anyone who walked in from the wilderness ought to understand that we don't have guidance yet.

[RatherBeGolfing]

45 minutes ago, Bird said:

And just for the record, if anyone hasn't been following, those of us who think that all repayments are pushed back think so because, well, the law seems to say that.

Those who haven't been following also need to know that this is one way to interpret the statutory language, it is not the only way.  If you talk to the folks who work with policy at recordkeepers and industry associations,  this is not how most interpret the statutory language. 

It is also important to point out that for an agency like IRS or DOL, the starting point for developing current guidance is to look at past guidance.  Could we get something that is different from past guidance?  Of course, but it is probably a good bet that most of it will be substantially similar to past guidance.  In that context, even if new guidance said " suspend all loan payments for 12 months",  they will probably still allow plans to adopt shorter delays, like they did in 2005-92.  So for those who are being notified by the plan or recordkeeper that payments will be delayed until January 2021, they are probably not wrong.

 

[Luke Bailey]

I think/hope that IRS will go with simplest

6 hours ago, RatherBeGolfing said:

Luke, in your example, I don't think you have to restart on 1/1/2021.  Scheduled loan payments would restart on 1/1/2021, but you don't have any payments scheduled for Jan 2021.  Your first loan payment of 2021 would be your first delayed loan payment.  So lets assume you suspended monthly payments starting with the 3/31/2020 payment.  Your first payment would be 3/31/2021.  The statute does not say "no loan payments for one year", it says "these loan payments are delayed for a year".  Restarting regular scheduled payments as of 1/1/2021, and restarting the delayed payments after one year of suspension, is consistent with the statutory language.

Exactly, RatherBeGolfing. I think that in that case IRS will likely say loan restarts 3/31/2021.

[Mike Preston]

So, we have come full circle, yes? If a loan provides for 4 repayment periods (see below) then it satisfies the rules?

1) Loan origination through date of suspension

2) Suspension period

3) Return to original loan payment for balance of one year after suspension period ends

4) Reamortization after one year after suspension period ends

Not the only way to comply, but one way.

[Luke Bailey]

I still find it hard to believe that there will be two different loan payment amounts (original after end of suspension period, e.g. January, 2021, and new amount after end of "1 year" delay). Seems to me that whenever the loan restarts, and regardless of the amount of time tacked on to the end for the extension, it should be reamortized back to a single payment amount. Did Notice 2005-92 have two different payment amounts once the loan restarted, one for an initial period and then a higher amount after that? In the Q&A's issued today the IRS says to look at 2005-92, although also says it will eventually issue new guidance.

[Mike Preston]

As iI have stated before 2005-92 is remarkably unenlightening in this regard.

[Bird]

11 hours ago, Luke Bailey said:

Did Notice 2005-92 have two different payment amounts once the loan restarted, one for an initial period and then a higher amount after that?

no

11 hours ago, Luke Bailey said:

In the Q&A's issued today the IRS says to look at 2005-92, although also says it will eventually issue new guidance.

They did.  I will freely admit the error of my ways when that guidance confirms that repayments must begin Jan 1 2021.  Until then, I'm thinking that the provisions of KETRA and CARES are not substantially similar with respect to the suspension dates.   "The Treasury Department and the IRS anticipate that the guidance on the CARES Act will apply the principles of Notice 2005-92 to the extent the provisions of section 2202 of the CARES Act are substantially similar to the provisions of KETRA that are addressed in that notice."

[RatherBeGolfing]

The safe harbor did not use different amounts once restarted and  then a higher amount once re-amortized, it re-amortized the full amount as of the restart.  That is the easiest way to do it.  You are not required to use the safe harbor.

I don't expect guidance to be too different from 2005-92.  The dates/periods are different, and they may be creative there, but most people who argue for "no payments at all for a year" are using the "any subsequent repayment" language to say that you move those payments along with the suspended payments.  That was not the interpretation of the same language in 2005, so I doubt they will say it meant X then, but it means Y now.

 

[Luke Bailey]

4 hours ago, Bird said:

no

Thank goodness. Two different payment amounts for the same loan would send a terrible message about the practicality of the federal government and its response to pandemic.