“I understand that loan repayments with due dates between March 27 and December 31 can be delayed for one year under the CARES Act. But what about payments that were due on or before March 27? We had some people that we furloughed prior to that date, and some of them have not made those payments.”
Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:
Unfortunately, loan repayments due on or prior to March 27 are not clearly delayed by one year. Pending additional guidance, they would likely be subject to the rules of your plan/loan policy as to when such payments would be considered to be in default and treated as a deemed distribution. See our prior Ask the Experts column as to when a loan is considered to be in default for details on these provisions. Note that IRS Notice 2020-23 would provide limited relief for those payments where the cure period falls between April 1 and July 14. In such case, the end of the cure period could be delayed to July 15.
There is some relief under the CARES Act for the participants in your situation. Since your employees have been furloughed, they would appear to be “qualified individuals” for purposes of the CARES Act favorable tax treatment for COVID-19 related distributions. Thus, if they are younger than 59 1/2, the 10% premature distribution penalty would be waived for any deemed distribution that occurs prior to December 31, the tax liability could be spread out evenly over three tax years, and taxes could be avoided entirely if the participants repay the deemed distribution to the plan within three years (if the plan permits). Note that a participant could claim this relief even if the plan does not adopt the CARES Act provisions regarding distributions and/or loans. Finally, as with all CARES Act questions, keep in mind that the IRS is continuing to issue more guidance, so stay tuned.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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