Does it matter that a coronavirus loan gets no relief from the prohibited-transaction exemptions’ adequate-security condition?

CARES Act § 2202(b) revises or relieves Internal Revenue Code of 1986 § 72(p) to allow a participant loan up to 100% (instead of 50%) of a vested account.  But I see nothing that relaxes the conditions of a prohibited-transaction exemption under ERISA § 408(b)(1) or IRC § 4975(d)(1).

Both those exemptions require that a loan be “adequately secured”.  The Labor department’s rule (which governs for IRC § 4975 too) requires adequate security and provides “[n]o more than 50% of the present value of a participant’s vested accrued benefit may be considered by a plan as security for the outstanding balance of all plan loans made to that participant[.]”  29 C.F.R. § 2550.408b-1(f)(2)(i).

What should a practitioner say about whether to apply or ignore that 50% condition to a participant’s claim for a loan that otherwise would be proper?

4 hours ago, Peter Gulia said:

CARES Act § 2202(b) revises or relieves Internal Revenue Code of 1986 § 72(p) to allow a participant loan up to 100% (instead of 50%) of a vested account.  But I see nothing that relaxes the conditions of a prohibited-transaction exemption under ERISA § 408(b)(1) or IRC § 4975(d)(1).

Both those exemptions require that a loan be “adequately secured”.  The Labor department’s rule (which governs for IRC § 4975 too) requires adequate security and provides “[n]o more than 50% of the present value of a participant’s vested accrued benefit may be considered by a plan as security for the outstanding balance of all plan loans made to that participant[.]”  29 C.F.R. § 2550.408b-1(f)(2)(i).

What should a practitioner say about whether to apply or ignore that 50% condition to a participant’s claim for a loan that otherwise would be proper?

Peter, I have pointed out elsewhere that the 100% option was an error in legislative thinking, but we got it anyway.  I have also suggested that anyone deciding to take advantage of the $100k limitation might still not go to 100% of the account.  As to whether its a violation, I guarantee they will deal with that issue and not incur the wrath of congress by playing that "gotcha" card!!!

I’ll tell a client it is a non-exempt prohibited transaction and might be a fiduciary’s breach, but that neither the borrowing participant nor either government agency will pursue enforcement.

Hi! It is up to the plan sponsor to offer this loan feature, therefore, your client can choose not to allow for this type of distribution feature to be added to their plan if they have concerns about repayments.

Veronica Bray

Managing Partner

RPAS