The CARES Act: Helping Your 401(K) Participants During the Coronavirus Crisis

The Enhanced Loan Provision for Qualified Participants

Updated through July 28, 2020
By Fred Reish, Bruce Ashton and Betsy Olson

With the spread of the coronavirus and the resulting closures and cutbacks, many 401(k) participants are working reduced hours, but are not considered to be terminated for purposes of ERISA. Furloughs and similar required leaves are common for businesses whose employees interact directly with retail customers, such as restaurants, stores, and gyms.

Many of those employees do not have high incomes or significant savings. As a result, they are likely facing financial crises, including possible eviction, loss of credit, and inability to purchase necessities. Employers, in their roles as plan sponsors, may be able to help those participants.

The CARES Act provides new options for participants to use the money in their 401(k) accounts to survive financially: changes in the participant loan rules and provisions for special coronavirus-related distributions. In addition, for those who can afford to do so, the CARES Act provides for a waiver of their required minimum distributions for 2020. All three of these changes are in effect now but are temporary changes. These are not mandatory changes, and it will be up to plan sponsors to decide whether or not to implement them. We will discuss each of these in a series of articles in the next couple of weeks. In this article, we discuss the loan provisions. NOTE: This article has been updated to reflect guidance issued after the original publication, in Internal Revenue Service (IRS) Notice 2020-50.

The following chart lists the old rules and the changes brought about in the CARES Act for participant loans:

Pre-CARES Rules The CARES Rules
Under Code Section 72(p), the maximum loan amount was the greater of 50% of a participant’s vested account balance or $10,000, but the loan may not exceed $50,000, reduced by the highest outstanding loan balance during the preceding 12 months. CARES provides that the maximum loan amount to a “qualified individual”* is now 100% of the participant’s vested account balance up to $100,000, reduced by the highest outstanding loan balance during the preceding 12 months.
Plans are required to specify the repayment terms.  Repayment was required to be made occur within five years, in substantially equal payments of principal and interest, made at least quarterly, with full repayment within five years.  A loan for the purchase of the employee’s principal residence was not subject to this 5-year repayment period. CARES grants a delay in repayment of a plan loan to a qualified individual* that is outstanding on or after the date of enactment of the Act.  If the due date for any repayment occurs between March 27, 2020 and December 31, 2020, the due date is delayed for one year.  Subsequent repayments are adjusted to reflect the delay, and the five-year repayment period is also extended by this moratorium.

Notice 2020-50 provides a safe harbor method for reamortizing repayments suspended during this period, as discussed further below.

Example:  If Participant A had a $30,000 vested account balance, the maximum loan that could be taken would have been 50% of that amount, or $15,000 (which is less than $50,000 but greater than $10,000).

But if Participant B had a $130,000 vested account balance, the maximum loan would have been $50,000 (which is less than 50% of the $130,000 account balance).

The CARES Example:  The maximum loan amount for Participant A will now be 100% of the vested account balance, or $30,000 rather than $15,000 (as a result of the change from 50% to 100% of the vested account balance).

The maximum loan amount for Participant B would be increased to $100,000 rather than $50,000 (as a result of the change from a maximum loan of $50,000 to $100,000).

As noted above, Notice 2020-50 provides a safe harbor method when a qualified individual’s obligation to repay a plan loan is suspended under CARES for any period beginning March 27, 2020, and ending not later than December 31, 2020 (the “suspension period”).   The safe harbor requires that: (1) the loan repayments resume after the end of the suspension period; (2) interest accruing during the suspension period is added to the remaining principal of the loan; and (3) the loan is re-amortized and repaid in substantially level installments over the remaining period of the loan (which may be extended by up to one year from the date the loan was originally due to be repaid).  If the safe harbor is met, the plan is treated as complying with the applicable requirements of Code Section 72(p).  This safe harbor resolves a number of open questions related to administration of this CARES provision.  However, note that compliance with the safe harbor is not required.

These coronavirus loan provisions are temporary and are in effect for a 180-day period, beginning on the date of enactment (March 27, 2020).   Though a plan amendment will be required to reflect these changes, there is also a delayed amendment deadline under CARES.  Plans may be amended retroactively if a plan amendment is adopted by the end of the plan year beginning on or after January 1, 2022, provided the plan has been operated as if the amendment was in effect.  Some recordkeepers are already implementing these changes, unless a plan sponsor affirmatively opts out, to facilitate the ability of participants to take advantage of the increased loan limits (as well as the other CARES Act provisions).  As a result, plan sponsors need to decide whether they want to implement the new requirements and communicate with their recordkeeper on their decision.


* Section 2202(a)(4)(A)(ii) of the CARES Act defines a “qualified individual,” as an individual “(I) who is diagnosed with the virus SARS– CoV–2 or with coronavirus disease 2019 (COVID– 19) by a test approved by the Centers for Disease Control and Prevention, (II) whose spouse or dependent (as defined in section 152 of the Internal Revenue Code of 1986) is diagnosed with such virus or disease by such a test, or (III) who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury (or the Secretary’s delegate).”  In Notice 2020-50, the IRS exercises this authority and expands the definition to include an individual who experiences adverse financial consequences as a result of one or more of the following: (1)having a reduction in pay (or self-employment income) due to COVID-19; (2) having a job offer rescinded or a start date for a job delayed due to COVID-19; (3) the individual’s spouse or member of the individual’s household being (1) quarantined, furloughed, laid off, or having work hours reduced due to COVID-19; (2) being unable to work due to lack of childcare due to COVID-19; (3) having a reduction in pay (or self-employment income) due to COVID-19; or (4) having a job offer rescinded or start date for a job delayed due to COVID-19; and/or (3) the closure or reduction of hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.  Employees may self-certify that they meet this definition.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.

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