One of the benefits from posting a techie blog for a dozen years or so is the tremendous value from other serious techies weighing in on what I write.
Robert Richter, now of ARA and chief editor of the EOB, has weighed in my posting on the suspension of the due date of loan repayment. I had posited that it is effectively is the participants choice, as the specific language of the statute declares that “such due date shall be delayed for 1 year” -when combined with the need of the participant to certify COVID status-effectively means an employee has the right to continue payments or not. I also suggested that the language of the statute means that the employer has no authority to impose a due date. He pointed out that the IRS may end up not agreeing, if past is prescient.
I have Robert’s permission to share his e-mail to me (he is in the process of doing a piece for ARA orgs on who has what choices under the CARES Act). Note, in particular, his light-hearted (though serious) note of caution at the end….
“The law appears to make the loan suspension mandatory. But…when you look at how the IRS interpreted the same provision that was in KETRA (note: the Katrina Emergency act), we have the following from Notice 2005-92. I think it’s reasonable to rely on that interpretation and conclude that it’s optional, not mandatory. But I do think IRS guidance on this is needed ASAP:
B. Suspension of payments and extension of term of loan. A special rule applies if a qualified individual has an outstanding loan from a qualified employer plan on or after August 25, 2005. Section 103(b) of KETRA provides that, for purposes of § 72(p), in the case of a qualified individual with a loan from a qualified employer plan outstanding on or after August 25, 2005, if the due date for any repayment with respect to the loan occurs during the period beginning on August 25, 2005, and ending on December 31, 2006, such due date shall be delayed for one year. In addition, any subsequent repayments for the loan shall be appropriately adjusted to reflect the delay and any interest accruing for such delay, and the period of delay shall be disregarded in determining the 5-year period and the term of the loan under § 72(p)(2)(B) and (C). Thus, an employer is permitted to choose to allow this delay in loan repayments under its plan with respect to a qualified individual, and, as a result, there will not be a deemed distribution to the individual under § 72(p).
Wash your hands, don’t touch your face and resist the urge to touch your retirement account.”
So, here’s what we have:
- The statute seems to make the suspension mandatory; yet
- As noted in my last blog, there’s a legal problem with this, given loans are existing, valid contracts under state law; so
- Did the IRS recognize this issue and try to fix it by claiming that the employer has the choice, because of its ability to change the loan policy under the plan?
- You know that there will be “curmudgeonly” employers out there who will NOT approve the suspension. I, personally, would think that the IRS could not tax that loan as being defaulted, even though it was reported as such on a 1099.
- Finally, Robert’s exhortation is among my favorite so far in this COVID season! Thanks!