IRS September 28 updated problem snapshot in which he discusses the laws and regulations governing plan loans.
Many pension plans allow participants to take out loans from their retirement accounts, although the plans are not required to do so, the IRS said. Eligible plans that meet the requirements of section 401 (a) of the Code, annuity plans that meet the requirements of section 403 (a) or 403 (b) and government plans as defined in section 72 ( p) (4) (B) may make loans available; IRAs and IRA-based plans such as SEP, SARSEP, and SIMPLE IRA plans cannot offer loans.
Requirement for a binding agreement
A Participant Loan must be a legally enforceable agreement (which may include more than one document) and the terms of the agreement must demonstrate compliance with the requirements of Section 72 (p) (2) and Treas. Reg. §1.72 (p) -1. Thus, the agreement must specify the amount and date of the loan as well as the repayment schedule. The agreement does not have to be signed if the agreement is enforceable under applicable law without being signed. However, the agreement must be set out in a written paper document or in a document which is delivered by an electronic medium under an electronic system as specified in Treas. Reg. §1.401 (a) -21.
Limits of loan amount
Section 72 (p) (2) (A) provides that the amount of a participant loan, when added to the outstanding balance of all other participant loans of all employer plans, cannot exceed the lesser of the following amounts:
- $ 50,000, reduced by the excess (if any) of the highest outstanding balance of the Plan’s loans during the period of one year ending the day before the date on which this loan was made, on the outstanding balance of the plan’s loans on the date on which this loan was granted, or
- The largest of:
- 50% of the member’s vested benefits; Where
- $ 10,000.
Article 2202 (b) (1) of the Coronavirus Aid, Relief and Economic Security Act (CARES) (PL 116-136) changes the dollar limit for loans made to a qualified person from from March 27, 2020 and before September 27. 23, 2020. For these loans, the limits increase under section 72 (p) (2) (A) as follows:
- the overall limit of $ 50,000 is increased to $ 100,000 and
- the limit on the total amount of loans is reduced from 50% of the vested benefits acquired from the participant to 100%.
Under section 72 (p) (2) (B), the repayment period of the scheme loan is to be limited to five years, unless the loan is used to purchase housing which, within a reasonable time , will be used as the main residence of the participant.
Section 72 (p) (2) (C) requires substantially uniform amortization over the life of the loan, with payments at least quarterly. However, this requirement does not apply if a participant is on good faith leave of absence for one year or less, but the loan (including interest accrued during the leave of absence) must be repaid no later than the last authorized due date. loan and the amount of payments due after termination of the leave must not be less than the amount required under the original loan. The payment amount should be adjusted to ensure that the loan is still paid off in five years.
Section 414 (u) of the Code provides for an exemption from reimbursement for persons in active military service. The regime can suspend the obligation to repay a loan during the period of active military service without causing default on the loan if payments resume at the end of active military service. Where the obligation to repay a loan is based on a period of active military service, the repayment period of five years may be extended.
The due date of any qualified person loan repayment that occurs between March 27, 2020 and December 31, 2020 is delayed for one year by section 2202 (b) (2) of the CARES Act. Any subsequent loan repayments should be adjusted to reflect the delay and the interest accrued during the delay. The delay period should not be taken into account in determining the 5-year period and the term of the loan under Articles 72 (p) (2) ((B) and C).
If the plan chooses to apply the provisions of the CARES Act, the plan document must be updated. The amendment must be adopted no later than:
- the last day of the first plan beginning on or after January 1, 2022, or
- a later date that the Secretary of the Treasury may specify.
A participant loan or part of it will become a deemed distribution for tax purposes if it:
- exceeds the maximum dollar amount;
- has payment schedules that do not meet payment deadlines or requirements; Where
- is in default when payments are not made.
A deemed distribution occurs the first time any of the above requirements are not met in form or function. This can happen at the time the loan is made or at a later date.
In three situations, the entire loan is considered a deemed distribution on the date the loan is made:
1. The terms of the loan violate the repayment time requirement of Article 72 (p) (2) (B),
2. The loan terms violate the level amortization requirement of section 72 (p) (2) (C), or
3. There is no legally enforceable agreement as defined in Treas. Reg. §1.72 (p) -1 Q & R-3 (b).
A deemed distribution of an amount different from the original loan amount may occur if:
1. the amount loaned exceeds the limits of section 72 (p) (2) (A), then the deemed distribution is the amount by which the loan exceeds the limits.
2. the participant has not made a maturity payment in accordance with the terms of the loan, then the deemed distribution is the amount of the outstanding loan balance plus accrued interest.
When a member fails to make an installment payment at maturity, the plan may provide for a “recovery period” which cannot extend beyond the last day of the calendar quarter following the one in which the installment payment is required. was due.
The CARES Act provides that plans may implement certain special rules for qualified persons regarding the plan’s overall loan limits and repayment terms. Under the CARES Act and IRS Notice 2020-50, which implements parts of it, a Qualified Person is anyone who is diagnosed – or whose spouse or dependent is diagnosed – with COVID-19 or suffers negative financial consequences as a result of the COVID -19 pandemic.
The IRS provides the following advice regarding indications that a problem may exist and how to prepare for an audit.
- Review the plan document and / or loan policy to make sure the plan is working in accordance with section 72 (p).
- Review past due participant loan documents. Records containing the necessary information may include, but are not limited to, loan agreements, promissory notes, spousal consents, and residential purchase documents.
- Determine if a loan should be considered a deemed distribution. Factors to consider are failure to meet the maximum amount, amortization level, or Treas’s enforceable contractual requirements. Reg. Article 1.72 (p) -1.
- Examine all 1099-R forms for deemed distributions to ensure that they were issued for the tax year in which the participant did not correct the defect at the expiration of the correction period that resulted in deemed distribution.
- Look for indicators of fraud.