CARES Act loan repayments/deemed distribution

With the CARES Act increase in plan loan limits, it seems more likely that a deemed distribution (rather than a loan offset) will be necessary when someone terminates employment with an outstanding loan and can't pay it off. That's because, if someone borrows 100% of their account balance, there will be little or no funds in their account to offset the loan balance against. Do you agree with that?

Also, does anyone believe whether a plan that adopts the CARES act loan repayment delay provision can (or must) extend the cure period when there is a deemed distribution of an outstanding loan?

Thanks for your help.

35 minutes ago, Ian said:

With the CARES Act increase in plan loan limits, it seems more likely that a deemed distribution (rather than a loan offset) will be necessary when someone terminates employment with an outstanding loan and can't pay it off. That's because, if someone borrows 100% of their account balance, there will be little or no funds in their account to offset the loan balance against. Do you agree with that?

No. The outstanding loan is still part of their account balance.  Example - account balance prior to loan is 100,000. COVID loan taken for 100,000. We'll ignore any payments/accumulated interest for illustrative purposes to keep it simple. Now they terminate employment, still owe 100,000. Their account value is still 100,000. The loan is offset. Account balance is now zero. 

1 hour ago, Ian said:

With the CARES Act increase in plan loan limits, it seems more likely that a deemed distribution (rather than a loan offset) will be necessary when someone terminates employment with an outstanding loan and can't pay it off. That's because, if someone borrows 100% of their account balance, there will be little or no funds in their account to offset the loan balance against. Do you agree with that?

Also, does anyone believe whether a plan that adopts the CARES act loan repayment delay provision can (or must) extend the cure period when there is a deemed distribution of an outstanding loan?

Thanks for your help.

Belgarath gave you the correct answer, but your question shows a fundamental error in your analysis of how loans work.  I think it's worth some time to make sure you understand what Belgarath is saying, because your comment about there being "little or not funds" in his account show that your understanding of the financial accounting of a participant loan needs some enhancement.  Don't feel bad; it is clearly one of those "accounting" concepts that many people have trouble with (I find myself having to explain this often to accountants and clients). My strong accounting background certainly helps us, but most in our business don't have that advantage and have to learn by the seat of their pants.  This fits in with the whole mistaken comment we often hear with regard to taking a loan from the plan: "wouldn't you rather pay interest to yourself than to the bank" which also shows a fundamental misunderstanding of investment concepts and something called disintermediation.

Hopefully this is helpful to some folks.

Thank you for setting me straight.

Just to make sure I understand:  Assume someone has a $50,000 account balance (of which $10,000 represents a loan) and terminates employment owing $8,000. The $8,000 loan offset leaves him with a "regular" $42,000 distribution. If he is a  "qualified individual," he has three years to come up with the funds to roll over the $8,000.

Is that all correct?

1 hour ago, Ian said:

Thank you for setting me straight.

Just to make sure I understand:  Assume someone has a $50,000 account balance (of which $10,000 represents a loan) and terminates employment owing $8,000. The $8,000 loan offset leaves him with a "regular" $42,000 distribution. If he is a  "qualified individual," he has three years to come up with the funds to roll over the $8,000.

Is that all correct?

Assuming $42,000 is rolled over, leaving him with $8,000 distributed for 2020:

He can include $8,000 in income for 2020, or include $2,667 in 2020, $2,667 in 2021, and $2,666 in 2022.

He can avoid income inclusion by repaying the $8,000, but if the repayment is done after any amount has been included in income, he will need to file an amended return

1 hour ago, RatherBeGolfing said:

Assuming $42,000 is rolled over, leaving him with $8,000 distributed for 2020:

He can include $8,000 in income for 2020, or include $2,667 in 2020, $2,667 in 2021, and $2,666 in 2022.

He can avoid income inclusion by repaying the $8,000, but if the repayment is done after any amount has been included in income, he will need to file an amended return

Love these PERFECT answers!  100% agree!

And if under 59 1/2, no early distribution penalty, correct?

3 hours ago, Ian said:

And if under 59 1/2, no early distribution penalty, correct?

Correct.

Is any thought as whether a plan that has adopted the CARES Act delay in loan repayments and permits a cure period for a deemed distribution would be allowed to (or required to) extend the cure period? Thanks.