Retirement Plan Loans and COVID-19: U.S. Department of Labor Fiduciary Relief and IRS Notice Allowing Short-Term Delay of Plan Loan Payments

As we discussed in our recent article, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) temporarily increases the permissible loan amount for loans taken by qualified individuals between March 27, 2020 and September 22, 2020 and suspends loan repayments due beginning on March 27, 2020 through December 31, 2020 for up to one year. The U.S. Department of Labor (“DOL”) recently announced relief for plan fiduciaries in connection with plan loans, including plan loans granted under the CARES Act.

DOL Guidance – EBSA Disaster Relief Notice 2020-01

Verification Procedures.  EBSA Disaster Relief Notice 2020-01 offers short-term relief to those plan administrators who take advantage of the new loan opportunities.  Specifically, EBSA Disaster Relief Notice 2020-01 states that the DOL will not treat failures to follow certain procedural requirements for plan loans and distributions imposed by the terms of a plan as a failure.  This enforcement relief will be available only if noncompliance is solely attributable to the COVID-19 outbreak, the plan administrator makes a good-faith effort under the circumstances to comply with the plan’s requirements, and the plan administrator makes a reasonable attempt to correct the procedural deficiencies as soon as practicable.  This relief for failures to follow verification procedures is limited to verification requirements required under provisions of Title I of ERISA that are within the interpretive and regulatory authority of the DOL (such as failure to follow the plan’s terms) and, for example, does not include spousal consent or other statutory or regulatory requirements enforced by the Internal Revenue Service (“IRS”).

Prohibited Transaction Relief.  EBSA Disaster Relief Notice 2020-01 also provides relief from ERISA’s fiduciary requirements in connection with participant loans granted under the CARES Act.  The Notice clarifies that the DOL will not treat any person as having violated the provisions of Title I of ERISA, including the requirement that plan loans be adequately secured and made available on reasonably equivalent basis, solely because:  (1) the person made a plan loan to a qualified individual during the loan relief period in compliance with the CARES Act and any related IRS guidance; or (2) a qualified individual delayed making a plan loan repayment in compliance with the CARES Act and any related IRS guidance.

Plan Amendments.  Further, the DOL will treat a plan that offers participant loans authorized under the CARES Act as being operated in accordance with the terms of such amendment prior to its adoption if the amendment is adopted on or before the last day of the first plan year beginning on or after January 1, 2022 or such later date (if applicable) prescribed by the Secretary of the Treasury and the amendment meets the conditions of Section 2202(c)(2)(B) of the CARES Act.

IRS Notice 2020-23 Loan Repayment Delay

Separate from the CARES Act loan repayment suspension, IRS Notice 2020-23, which was released on April 9, 2020 to extend key tax deadlines for individuals and businesses during the COVID-19 emergency, includes a provision that delays any 401(k) loan payments that are due between April 1, 2020 and July 14, 2020 until July 15, 2020.

Unlike the CARES Act suspension, which disregards the period during which the payments are delayed in determining the five-year term limit, the Notice 2020-23 loan payment delay does not allow for the term of the loan to be adjusted to take into account the missed payments.  Without further guidance from the IRS, the plan participant will be required to repay all missed loan repayments as of July 15, 2020.

The Notice 2020-23 payment delay may impact the timing of when a plan loan defaults.  If the participant missed a loan payment in April, May or June, 2020, the latest date the participant would have to make a repayment without incurring a default would be September 30, 2020 (the maximum “cure period” allowable under the Internal Revenue Code extends to the end of the calendar quarter following the quarter in which the missed payment was due).  But if the loan repayment due date is delayed until July 15, 2020, the loan default would occur on December 31, 2020.

Plan sponsors should consult with their recordkeepers to ensure any loan payments delayed in reliance on Notice 2020-23 or suspended by the CARES Act are properly taken into account.

Visit our COVID-19 Resource Center often for up-to-date information to help you stay informed of the legal issues related to COVID-19.

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