CARES Act - Loan Provisions

Two questions:

1. Does the 100k limit increase come with any provisions for extended loan repayments, or do they have to abide by the 5 year rule?

2. Can a qualified individual take a new loan and suspend payments immediately until 1/1/2021, or do the suspension rules only apply to outstanding loans as of 3/27/2020. Just a question of whether these rules only apply to already existing loans or new loans too...

16 minutes ago, nerd-party-administrator said:

Two questions:

1. Does the 100k limit increase come with any provisions for extended loan repayments, or do they have to abide by the 5 year rule?

2. Can a qualified individual take a new loan and suspend payments immediately until 1/1/2021, or do the suspension rules only apply to outstanding loans as of 3/27/2020. Just a question of whether these rules only apply to already existing loans or new loans too...

 

nerd-party-administrator:

1. The statute applies the extension to "any loan" outstanding on or after date of enactment, so basically you could take the $100k and have first payment a year later.

2. See answer to 1.

Of course, the participant does need to be COVID-19 affected (as defined in statute) to get the extension.

Regarding the repayment 1-year later - is that still beginning 1/1/2021? Or 1-year from the date of the loan? I am having a very tough time with this 1-year delay but that payments still must begin no later than 1/1/2021. I feel that many plan sponsors and participants are being misled regarding the loan repayment suspension period!

19 hours ago, JustMe said:

I feel that many plan sponsors and participants are being misled regarding the loan repayment suspension period!

There is a lot of confusion regarding this part, I don't think anyone is intentionally misleading sponsors and participants.  We will hopefully get IRS guidance soon, but Notice 2005-92 2005-98 does give us some insight.

The one year delay and the suspension period are actually two separate things. 

- The suspension period is March 27, 2020 through December 31,2020

- the one year is how long you get to suspend payments that occur during the suspension period. 

So if the first payment you suspend is your April 15 payment, all payments through December 31 are suspended for one year.  You resume your regular payments after the suspension period is over (January 2021) and you have to start paying on your delayed payments after the one year delay.

The safe harbor in Notice 2005-92 2005-98 was to delay payments during the suspension period, and then re-amortize over the remainder of the loan plus the suspension period.

The suspension period used in notice 2005-92 2005-98 (from KETRA) was actually longer than the one year delay.  Today we have the opposite in CARES, where the suspension period is shorter than the one year delay.

1 hour ago, JustMe said:

Regarding the repayment 1-year later - is that still beginning 1/1/2021? Or 1-year from the date of the loan? I am having a very tough time with this 1-year delay but that payments still must begin no later than 1/1/2021. I feel that many plan sponsors and participants are being misled regarding the loan repayment suspension period!

I agree.  Someone, too clever by half, applied the logic from KETRA in IRS Notice 05-92 to this situation and now it is "all over the place."  The difference is, the suspension period for KETRA was actually more than one year (8/25/2005 - 12/31/2006), so the safe harbor language in the notice effectively extended the "one year" to 12/31/2006 no matter what.  Here the suspension period is less than one year and (I think) there is no way they are going to do the same thing - make loan payments due sooner than otherwise required.

Sigh.  RBG (just) beat me to it.  "I agree with RBG."

56 minutes ago, RatherBeGolfing said:

So if the first payment you suspend is your April 15 payment, all payments through December 31 are suspended for one year.  You resume your regular payments after the suspension period is over (January 2021) and you have to start paying on your delayed payments after the one year delay.

I think I concur, but the specifics still bog me down.  Going back to the detail of the loan that Luke and I have discussed (monthly payments at the end of each month), are you arguing for the following:

Original payment amount per month: $200.

Payments on and after 4/30/2020 through 12/31/2020 are delayed for one year.

Payments from 1/31/2021 through 3/31/2021: $200 per month

Payments from 4/30/2021 through 12/31/2021: $200 * (1 + i) where i is the loan interest rate. If i = 4%, each of those 9 payments is $208.

Payments from 1/31/2022 through a date which is 9 months after the original loan due date which reamortize the loan on a level basis through the date which is 9 months after the original loan due date

That is, the reamortization period ends on the date which is X months after the original loan due date; where X is the number of months where payments are not made AT ALL.

Alternative 1: The reamortization period ends on the date which is 12 months after the original loan due date.  Note that in this case the monthly payments during the reamortization period are likely to be less than the original payment of $200.

In either case you are arguing for 4 different monthly payment amounts:

1) The initial amortization amount

2) $0 for the period that ends 12/31/2020

3) [1] * 1 + i for the balance of the payments before the end of the 12 month period

4) Reamortization amount

Anybody care to tweak this?

So RBG, you are saying that when 2202(b)(2)(C) says you can lengthen the original repayment period by "the period described in subparagraph (A)" it is referring to the 3/27/2020 - 12/31/2020 suspension period, and not the 1-year period by which each payment may be delayed? I think the statutory language would support either approach, and the latter would sure be much simpler.

Mike, I think I follow your math, but your first example shows up one of the problems with saying that the "period" referred to in 2202(b)(2)(C) is the 3/27/2020-12/31/2020 suspension period. I guess you're right that if that is the way it is to be taken, since the period of the suspension ends 12/31/2020, but the payments skipped during the suspension period don't restart until a year after they were suspended, you would need to return to the original payment amount as of 1/1/2021, then switch to the reamortized amount as of the first payment that was delayed by one year. An extra credit math problem to be sure. Would be much easier if the one-year  period being referred to was the period by which the first payment was postponed, which is what I assumed in my original example. In that case, you would merely reamortize once, to take into account the interest for the delay in payment, when the loan restarted exactly one year after the first missed payment, and adding exactly one year to the period that the loan had left on it at the time of suspension.

Is this not a possible interpretation?

Anything is possible without guidance to the contrary!

16 hours ago, Luke Bailey said:

So RBG, you are saying that when 2202(b)(2)(C) says you can lengthen the original repayment period by "the period described in subparagraph (A)" it is referring to the 3/27/2020 - 12/31/2020 suspension period, and not the 1-year period by which each payment may be delayed? I think the statutory language would support either approach, and the latter would sure be much simpler.

That is how I interpret it.  My understanding is that this is also how most of the policy folks at the recordkeepers are interpreting it.  The safe harbor under 2005-92 2005-98 uses remaining period of the loan, plus suspension period.  Absent IRS guidance on CARES, I think that is the logical interpretation considering previous guidance in 2005-98.

2005-92 2005-98 says that loan payments must resume at the end of the suspension period.  If we apply that to CARES, regular loan payments must resume in January of 2021.  The suspended payments won't be due until after the one year delay (Most likely no earlier than April), but the maximum period you are disregarding from the 5 year term is 9 months (Apr-Dec).  It doesn't make sense to add 12 months to the term when you had 9 months of non-payment. A more extreme example would be taking a loan in December, start paying in January, re-amortizing in December, and get a full 6 year term to pay it off.

I think it comes down to what @Bird mentioned above.  If the IRS comes out with CARES guidance that says that since the suspension period is less than 12 months, you get to delay all payments up to March 26, 2021, then I agree you would add 12 months to the end of the original term.  The guidance would need to be inconsistent with 2005-92 2005-98 in order to make it work.  Im not so sure they will focus on suspending all payments for 12 months rather than suspending all payments on or before December 31 though.  Either way I think it will be a hard stop at December 31 or March 26.  So the only way you get a full 12 months added on is if you had an existing loan at enactment.  

1 hour ago, Mike Preston said:

I think I concur, but the specifics still bog me down.  Going back to the detail of the loan that Luke and I have discussed (monthly payments at the end of each month), are you arguing for the following:

Original payment amount per month: $200.

Payments on and after 4/30/2020 through 12/31/2020 are delayed for one year.

Payments from 1/31/2021 through 3/31/2021: $200 per month

I'm with you this far.  Where I go a different way is at the 4/30/21 payment.  I would re-amortize the remainder of the original balance plus accrued interest over the remaining original loan term plus the 9 month suspension period.  Only 2 different payment amounts unless you count $0 as a payment amount.

Well, at least now I understand the position and why some are seeing such great complexity. 2202(b)(2)(A) has two time periods in it, and (C) can point back to either. To me the policy weighs in favor of giving a full year, because of the simplicity and the likelihood of a long recovery. Will be interesting to see what happens.

5 hours ago, RatherBeGolfing said:

I'm with you this far.  Where I go a different way is at the 4/30/21 payment.  I would re-amortize the remainder of the original balance plus accrued interest over the remaining original loan term plus the 9 month suspension period.  Only 2 different payment amounts unless you count $0 as a payment amount.

Yes, in retrospect I think it should end up being 2 different payment amounts (ignoring the suspension period where there is a zero payment).  I'm just not willing to invest time in a spreadsheet where there are this many unknowns.

I think the Notice being discussed here is Notice 2005-92 (not Notice 2005-98). 

23 minutes ago, ErisaGooroo said:

I think the Notice being discussed here is Notice 2005-92 (not Notice 2005-98). 

You are correct

18 hours ago, Luke Bailey said:

Well, at least now I understand the position and why some are seeing such great complexity. 2202(b)(2)(A) has two time periods in it, and (C) can point back to either. To me the policy weighs in favor of giving a full year, because of the simplicity and the likelihood of a long recovery. Will be interesting to see what happens.

Ft Williams just released optional language to their loan documents, and they are limiting suspension to payments due before December 31, 2020, noting that further guidance is needed from IRS/DOL.

I ave not seen anything from other document providers yet. 

                I would take a somewhat different approach than the above thoughtful approaches.  I would also raise the question whether an ERISA plan administrator would be fulfilling its fiduciary responsibilities by offering plan participants and beneficiaries the opportunity to suspend the payment of a plan loan if the administrator could not and did not at the same time disclose the consequence of such suspension on the individual’s future plan payment obligations.

                      The CARES Act declares that “subsequent repayments with respect to any such loan shall be appropriately adjusted to reflect the delay in the due date under subparagraph (A) and any interest accruing during such delay.” [CARES Act § 2202(b)(2)(B) (emphasis added)] Thus, the suspended payments are not simply increased to reflect their delay in payment without changing the amount or the frequency of the originally scheduled post-2020 payments.  The Act limits the suspension to the 2020 payments, so the plan may not simply maintain the original payment frequency but postpone all the originally scheduled post-2020 payments for 12 months, but add a one-year interest rate to each of those payments, which would make each post-suspension payment identical.  Instead, the CARES Act appears to provide that the payment frequency be maintained, but the number of post-suspension payments will be the sum of (A) the number of suspended payments and (B) the number of payments not suspended. [This is consistent with disregarding the payment suspension for the purpose of determining the 5-year period and the term of a loan under subparagraph (B) or (C) of Code § 72(p)(2). CARES Act § 2202(b)(2)(C)]. In particular, if three quarterly payments were delayed, three quarterly due dates would be added to the original post-suspension payment quarterly due dates.  [Thus, if three quarterly payments due on June 30, 2020, September 30, 2020 and December 31, 2020 were delayed, but four later payments were not, seven quarterly payments would be due beginning March 31, 2021, and concluding on September 30, 2022 rather than concluding on the original due date of December 31, 2021].  However, those payments must be increased to take into account how the interest accruals resulting from the suspended payments increased the loan balance. [CARES Act § 2202(b)(2)(B) providing for an adjustment for interest accruing during the delay in payment].  Thus, the post-suspension payments will increase, which raises the question how to best comply with the level amortization payment requirement of Code Section 72(p)(2)(C) for such post-suspension period.  The most reasonable answer is to use identical post-suspension payments, rather than varying post-suspension payment amounts, such as one amount for the first 2021 payments that were not delayed, a second amount for the delayed 2020 payments, and a third amount for all other post-suspension payment. This level payment can be generated by computing the December 31, 2020 loan balance to take into account the suspended payments, and then recomputing the level amortization payments to amortize that balance. [For example if the original loan was made on January 1, 2020 for $10,000 with an annual 6% interest rate with 60 monthly payments of $193.33, and the final eight 2020 payments beginning on May 31, 2020 were suspended the balance would increase from $9,422.37 on such date to $9,799.27 on December 31, 2020 as a result of the payment suspension. Therefore, monthly payments would increase to $201.06 beginning on January 31, 2021, and ending not on the original due date of December 31, 2025, but eight months later, on August 30, 2026]   This is the safe harbor approach proposed by the IRS for virtually the same KETRA language. [IRS Notice 2005-92, 2005-2 C.B. 1165, 1171-72 Example.] 

As has been stated at some point above, I think, 05-92 is incredibly unenlightening because the end of the suspension period coincides with the end of the delay period.  It provides no guidance when the end of the delay period encroaches on a period of time when payments are not suspended.   That is, when the delay period (1 year) is greater than the suspension period (8 months). As an aside, your 6% is 12 times the monthly rate (.5%) [typical banker's approach]. I would call that a loan at 6.16778% per annum.

All of your calculations revolve around that interest rate, but I'm still having a hard time matching some of your numbers.  For example, you use 9422.37 as of 5/31, but that is actually the amount outstanding immediately after the 4th payment is made [4/30].

Also, your 6% is referred to as the nominal rate.  My 6.16778% is the effective rate.

16 hours ago, Albert F said:

I would also raise the question whether an ERISA plan administrator would be fulfilling its fiduciary responsibilities by offering plan participants and beneficiaries the opportunity to suspend the payment of a plan loan if the administrator could not and did not at the same time disclose the consequence of such suspension on the individual’s future plan payment obligations.

That's just looking for trouble.  No way are they saying "here you can do all this stuff" and then pull a Catch-22 like that.

15 hours ago, Mike Preston said:

As has been stated at some point above, I think, 05-92 is incredibly unenlightening

exactly

15 hours ago, Mike Preston said:

For example, you use 9422.37 as of 5/31, but that is actually the amount outstanding immediately after the 4th payment is made [4/30].

Agree, I can come up with that number but not that date.

BTW, does anyone write loans that are issued on Jan 1 with due dates on the last day of each month (not the first day?).

2 hours ago, Bird said:

BTW, does anyone write loans that are issued on Jan 1 with due dates on the last day of each month (not the first day?).

When theorizing about loans, sure. Loans use end-period amortization, just like a mortgage, so it makes sense to think about it that way. It also helps to pretend that a month is exactly one-twelfth of a year.

In the real world, we write loans with due dates that coincide with payroll dates.

It appears that most (but certainly not all) industry groups and recordkeepers are coalescing around two interpretations for the CARES Act loan provisions:

1) Loan payments from 4/1/2020-12/31/2020 (9 months) are suspended, and payments resume on 1/1/2021 under a reamortized loan amount. 

2) The term of the loan is extended by 9 months (thus interpreting the "period" referred to in 2202(b)(2)(C) to be the 3/27/2020-12/31/2020 suspension period)

Assuming that to be true, then the participant has no "due dates delayed for 1 year" which is part of the statutory text. How do you explain to participants and plan sponsor that even though the statutory text contains a 1 year delay, in operation, nothing is being delayed for 1 year? The two interpretations above act as if the 1 year verbiage is not even  in the statutory text.

This article by Robert Richter compares a few different interpretations of CARES 2202(b)(2): https://www.asppa.org/news/browse-topics/covid-19-loan-repayments—how-many-licks-does-it-take-get-center-tootsie-roll-pop

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

48 minutes ago, Gruegen said:

Assuming that to be true, then the participant has no "due dates delayed for 1 year" which is part of the statutory text.

That is not what the statute says.  The statute says that loan payments with due dates during a certain period shall be delayed for 1 year. 

53 minutes ago, Gruegen said:

How do you explain to participants and plan sponsor that even though the statutory text contains a 1 year delay, in operation, nothing is being delayed for 1 year? 

Again, the statute doesn't say "you will have no payments for one year", it says "these payments are delayed for one year".  

Lets look at a loan that has a final payment due date on December 31, 2020.  The first delayed loan payment is March 31.  March 31-December 31 are suspended for 1 year.  There is no regular payment to resume on January 1, so the re-amortized loan starts again on March 31, 2021.  That is a delay of a year.

1 hour ago, Gruegen said:

The two interpretations above act as if the 1 year verbiage is not even  in the statutory text.

See above.

The recycled language in the statute makes it a matter of interpretation. Most interpretations are staying close to the safe harbor in 2005-92.  I know people take issue with that because the suspension period was longer than a year then, and its shorter than a year now, but I see no harm in using the safe harbor until we have further guidance.  The payments will resume well after we have guidance, so there is time to fix it.  Notice 2005-92 also states that the plan can use a shorter period, so it would reason that you wouldnt have to change at all if you go with a more conservative approach.

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

So how long can a super-smart TPA wait?

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.  

       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.

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.

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?