With few notable exceptions, the statutory and regulatory references we need in the administration of plans are at our fingertips from a number of easily accessible internet resources, a great deal of them actually available for free. Sometimes I do wonder how we were ever able to practice back in the 80’s and 90’s without these resources -which we do really now take for granted.

One of the most annoying of those “notable exceptions” is found under Code Section 411(e) of the Code, the vesting standards which apply to governmental and church 401(a) plans. Section 411(e)(2) states, in pertinent part, that these plans “shall be treated as meeting the requirements of this section, for purposes of section 401(a), if such plan meets the vesting requirements resulting from the application of sections 401(a)(4) and 401(a)(7) as in effect on September 1, 1974.”

Really? Have you ever tried to find “401(a)(4) and 401(a)(7) as in effect on September 1, 1974.”?

Well, if you have need of it, Section 401(a)(4) in effect on that date read as follows:

“either benefits or contributions must not discriminate in favor of employees who are officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees.”

Section 401(a)(7) in effect on that date reads as follows:

“A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that, upon its termination or upon complete discontinuance of contributions, under the plan, the rights of all employees to benefits accrued to the date of such termination or discontinuance, to the extent then funded, or the amounts credited to the employees’ accounts are nonforfeitable. This paragraph shall not apply to benefits or contributions which, under provisions of the plan adopted pursuant to regulations prescribed by the Secretary or his delegate to preclude the discrimination prohibited by paragraph (4), may not be used for designated employees in the event of early termination of the plan.”

The IRS   added a further twist, however.  In its 1972 version of Publication 778, as referenced in its  Memorandum To Managers of April 30,2012, the IRS took the position that the pre-1974 rules also require that all participants be fully vested as of the plan’s normal retirement age.

You can find much of this at this IRS link

This is an odd sort of application of the vesting rules, which require use of general nondiscriminations standards as a sort of threshold to being able to vest or non-vest benefits.

It is these quirky sort of rules which make this profession so fascinating…..


Of all the difficulties that employers face when they struggle with their decisions on managing employees during these disruptive times, it would seem that among the least of their immediate worries is whether or not-and to what extent-the variety of different steps they take to control costs causes a “partial termination” of their 401(k) plan. Whether or not, and what sort of, any reduction in force and for what period of time, will trigger the count toward the 20% employee reduction threshold for vesting is not front and center in their business survival plans.

It will be, however, chief among the debris that will need to be cleaned up as we work our way through this economic disaster, especially as rent becomes due and partially vested former employees need to take withdrawals from their plans.

Tax exempt organizations are among those organizations which are particularly hardest hit right now, either being educational organizations faced with terrible choices, or being an org with increased demands for their services with a concurrent reduction in their funding.

At least the “partial termination” rules are pretty straightforward, and TPAs and recordkeepers all know where to draw the line and provide guidance to their clients.

Or so you would think. But the 403(b) termination vesting rules are vastly different than those for 401(k) plans. In fact, you’ll find that there just aren’t any in the Tax Code, ERISA or Tax regulations.

Consider the following:

  • The Tax Code’s vesting rules do not apply to 403(b) plans, at all.
  • Technically, neither the Tax Code or the 403(b) tax regulations require that non-vested employer contributions be vested on plan termination.
  • ERISA’s vesting rules-which apply only to ERISA 403(b) plans, not non-ERISA plans- and its regulations do not require any plan, whether it be 403(b) or 401(k), to vest non-vested employer contributions on plan termination.
  • However, both the IRS and the DOL rules do require that an employer follow the terms of the plan document, and the IRS List of Required Modifications  (the “LRM’s) for pre-approved 403(b) plans do require that non vested employer contributions be fully vested upon plan termination as a matter of the plan’s terms.

So, though we have no statutory or regulatory requirement that vesting be required on a 403(b) plan termination, the IRS requires and imposes it as a sort of matter of practice.

What then about the 401(a) partial vesting rules, which requires full vesting for those who have left employment at a time of a plan “partial termination?” Well, also consider that:

  • this is a rule found in Code Section 411(d)(3);
  • 411(d)(3) does not apply to 403(b) plans;
  • ERISA doesn’t require vesting on partial termination; and
  • the IRS 403(b) LRMs do not require vesting on partial termination.

Therefore, there is no “vesting on partial termination” for 403(b) plans, and no need to track the “20%” (or so) rule for vesting on partial terminations for a 403(b) plan. That rule simply does not apply. This is true for both ERISA and non-ERISA 403(b) plans.

So, as a practice note, if you have mistakenly applied that “partial termination” vesting rule to a 403(b) plan you may have an operational error. Check your plan document, it may have a partial termination rule. If it does not, consider whether it is an error which can be corrected by retroactive plan amendment. Nothing prevents a plan sponsor, by its terms, to adopt this rule. But it is only matter of plan design, not because of any Code or ERISA imposed rule.

We have submitted our comment to the DOL in response to its RFI on PEPs, including its inquiry as to whether a prohibited transaction exemption will be necessary to the operation of PEPs.

We noted that it is our view that the new PEP rules do not add any new services to the marketplace. Rather, PEPs merely reorganize existing services to be provided in a different format, with the one exception is that it now permits unrelated employers to be able to file a consolidated Form 5500. Further, we believe the Department’s issuance of guidance as to the allocation of these different authorities (consistent with in ERISA Section 3(44)(C) which requires the Department to ‘‘(i) to identify the administrative duties and other actions required to be performed by a pooled plan provider…”) is a required condition precedent to the determination of whether any prohibited transaction exemptive relief is necessary in the operation of a PEP. We encouraged the DOL to amend the 408(b)2 regs and the regs on the allocation of fiduciary authority to specifically apply the in the special circumstances arising under a PEP.

Read our comment letter here


Attempting to assess the impact of DOL’s newly proposed fiduciary “prohibited transaction exemption” (let’s call it the “Fiduciary PT”) is almost like trying to figure out a Rubik Cube, given all of the moving pieces. But ultimately there may not be many parties who actually will need it. Consider the following when trying to figure how this new rule affects things:

  • Broker/dealers and registered reps who are not dually registered as Investment Advisers. The new Fiduciary PT may not be needed at all by this class of “adviser.”
    • This new Fiduciary PT permits investment fiduciaries to receive variable compensation.
    • However, the SEC’s “solely incidental” rules only permits the “non-IA” registered rep to give investment “recommendations” to a fiduciary which are “solely incidental” to the actual investment transaction.
    • To be an ERISA fiduciary, the recommendations must be made on a regular basis pursuant to a mutual understanding that the advice will serve as a primary basis for the investment decisions with respect to plan assets.
    • It would seem that providing on advice on a “regular basis” may well violate the SEC’s “solely incidental” exemption under the Investment Advisers Act of 1940, and may cause that registered rep to be required to register as an Investment Adviser. So, the rep, legally, may not even be able to act as an ERISA fiduciary to a plan if it never becomes dually registered.
    • Note how this compares to the vacated fiduciary rule (let’s call it the “Borzi Rule”). Under the Borzi Rule, a rep giving “solely incidental” recommendations would be considered a fiduciary, even though they would not have to register as an Investment Adviser under the SEC rules.
    • Though registered reps will not need to comply with the Impartial Conduct Standards (ICS) under the Fiduciary PT, they will, however, still be required to comply with the SEC’s Best Interest Standards which apply to the rest of their non-plan business.
    • Therefore, I think this may mean that no registered rep who is not dually registered (or at least one who complies with the SEC rules) can ever really be an ERISA fiduciary, which means they will never need this new Fiduciary PT in order to receive comp which varies based on their “recommendations.” So, at least in the retirement plan market, is there even going to be much of an effect?
  • Investment Advisers. Again, there may not be much of an impact.
    • Under the Pre-Borzi Rules, the prohibited transaction rules forced IAs to adopt compensation practices which did not include variable comp. This mostly impacted those who were paid through revenue sharing: their comp was at a set level, and their agreements with the plan called for the plan (or the employer) to make up the difference if there was a shortfall in the revenue sharing, or to cap their pay if there was excess revenue sharing.
    • I was always amazed at the pushback in the retirement plan world to the Borzi rule, because it actually (unlike registered reps) helped IAs: that rule permitted IAs to receive variable comp as long as they met the Impartial Conduct Standards and complied with all of those implementation rules.
    • However, my experience was that IAs did not generally change their comp practices to permit variable comp. It will be interesting to see if variable comp is reintroduced into the IA market.
    • The unique nature of a prohibited transaction exemption is that it only permits the transaction, as long as everything else is kosher.  The IA will still have to meet ERISA’s prudence and exclusive benefit standards, and be able to prove that the advice was prudent, and that they did not take into account their own pecuniary interests in providing the advice-which, I guess, is the purpose of the Impartial Conduct standards in the Fiduciary PT (or at least it helps).
  • Existing Prohibited Transaction Class Exemptions 75-1, 77-4, 80-83, 83-1, 84-24, and 86-128. It is the lack of the rule that will have an impact, but not the new Fiduciary PT itself.
    • There is a whole host of prohibited transaction class exemptions (listed above) under which the Borzi Rule imposed an Impartial Conduct Standard as a condition of those exemptions (these include, for example, authorizing the payment of insurance company commissions).
    • When the Borzi Rule was vacated, it also meant that the ICS  requirement was removed as a condition from those PTEs.
    • The new Fiduciary PT did not re-impose that ICS as a condition of the exemptions.
    • There is a downside to the ICS not applying to those old PTEs. The ICS did have the effect of documenting that compliance with ERISA’s prudence and exclusive benefit rules, which is still required under some of these exemptions.  Those parties involved in those arrangements will now be compelled to establish standards which may look something like the ICS in order to demonstrate ERISA compliance.

The ERISA marketplace is complex, with a plethora of different sorts of arrangements which will be affected in a variety of different ways by this Fiduciary PT. In general, however, I would be little surprised if it ends up being that not many parties will have the need to take advantage of this new exemption.

Pooled Employer Plans (PEPs) are soon coming to a theater near you. A PEP is a new kind of MEP brought to you by the SECURE Act, which will permit unrelated employers to participate in the same plan. These new types of plans will become available January 1, 2021, but a lot of work needs to be done between now and then in order to make the PEP a reality. The DOL especially has a heavy lift here, as there is a multitude of questions which need to be answered for these things to actually work.

Key among all of the unanswered questions is how all of the players in a PEP are going to be able to get paid. There’s the Pooled Plan Provider, the investment manager, the investment platform, the plan administrator (if it’s not the PEP), and, of course, distribution. A PEP will not work unless there is comp.

Compensation related to ERISA plans is governed by what I call the “squat rule”-as in you can’t get paid “diddly-squat” under ERISA unless it is permitted by a prohibited transaction exemption (a “PTE”). PTEs are either found in ERISA itself; issued under published regulations by the DOL; or granted by administrative fiat by the DOL (there are either individual or “class” exemptions). As you can imagine, there is a substantial body of prohibited transactions which has grown over the years to accommodate all sorts of ERISA plan relationships.

Normally, all of the players in any ERISA plan’s life cycle operates under any number of these well-established PTEs. However, in that the PEP is a new sort of arrangement, it is not entirely clear that these existing PTEs will be sufficient to pay all of the PEP players. To address this crucial issue, the DOL has issued a Request for Information on June 18 to gather information on what further, if any, PTE relief will be needed to make the PEP work. There is a 30-day response window, which makes all the sense in the world given that time is getting short before the January 1 PEP effective date.

There are two noteworthy developments related to these efforts. The first is the ARA/ASPPA letter to EBSA requesting PTE relief for PEP operatives. The second, and perhaps more striking development, is the letter Congressman Neal wrote to the EBSA opposing the loosening of the prohibited transaction rules for PEPs. I invite you to read these two opposing views, as how this is resolved will ultimately determine who can offer a PEP and who cannot.

I will be submitting my own comment to the DOL in response to the RFI as well. My initial view, however, is that while exploring whether further PTEs are needed is an important step in the regulatory process, this effort may be premature-or even unnecessary. Whether or not a PTE is needed will largely hinge on other clarification from the DOL on the nature of the roles of the Pooled Plan Provider, the participating employers, and the named fiduciaries to who authority under a PEP will be delegated. How these are answered may well address the concerns raised by both Rep. Neal and the ARA.

It is nice to be able to come back up for air and take the time to write again. Conni and I are both fine, by the way. The only COVID hardship we seem to be personally dealing with now, fortunately, is lack of sleep…..Oh, and yes, for those inclined, you will be able to listen to this post as a podcast by going to the sidebar-which, by the way, also discuss my 18 year old sourdough starter….

IRS’s Notice 2020-50 is actually a nice piece of work by IRS and Treasury, as the CARES Act terms really had to be unpacked piece by piece. The drafters had to resolve a number of issues, and they did so in helpful detail.

There is so much detail in there, you probably could write a a chapter on the actual implementation of all of those elements addressed. What I thought may be useful to discuss is what happens when an employer chooses NOT to offer the CRD relief under the CARES Act. A surprising number of employers have taken this approach. But the employer’s decision is not the final word on this matter, because the statute grants participants specific tax benefits regardless of the sponsor’s choice. So what does this actually mean for participants?

  • Employer chooses not to permit CRD distributions at all.

Consistent with its past position on disaster related distributions, IRS and Treasury have taken the position that an employer can choose to whether or not offer CRD distributions from the plan. Though I believe they could have legitimately taken the other position (that is, the employer had no choice), this is clearly the more conservative approach. Wisely, however, IRS has also said, that the employer must  uniformly deny (or offer) CRD treatment under the plan.

Notice 2020-50 also made it clear that the employer cannot prevent the participant from claiming CRD tax treatment on (most) distributions the participant otherwise does take during the relief period, even where the employer has chosen not to “opt” for CRD relief. Thus, most participant distributions (except for things like corrective distributions) will be exempt from the 10% penalty tax, will be eligible to be taxed ratably over 3 years, and be able to rollover that amount. Even hardship distributions or RMDs, which typically cannot be rolled over, will still be eligible for rollovers- even taxation from defaulted loan offsets will be afforded this treatment (but not deemed distributions from defaulted loans which have not been offset).

It does not appear that the participant has to file a CRD certification with the plan administrator to get this favorable tax treatment, they just have to be able to prove they meet the (newly expanded, thank you!) CRD standards.

Obnoxiously, the employer can still file a 1099-R with the notation saying that this is an early distribution with no exception-and the 20% will be withheld-but the participant can offset this by filing the 8915-E.

  • CRD Rollovers

Even if the employer does not extend CRD coverage under the plan, if the plan accepts rollovers, it will still have to accept the rollovers back into the plan of distributions the participant has treated as CRD. All the recalcitrant employer can do to stop these rollovers is to cease all rollovers

  • Employer doesn’t expand CRD to $100,000.

Even if the sponsor doesn’t offer CRDs, or limits them below $100,000, the participant still has an individual limit of treating distributions from all other plans as CRDs. So, for example, where the employee maintains an 401(k) account with a former employer (or, as is often the case in the 403(b) market, maintains contracts from all sorts of former employers) they can still take distributions from those accounts and claim CRD treatment on the first $100,000 from those account-even without employer approval of CRD treatment.

  • Employer does not institute loan payment suspension

I had blogged on this point of loan suspensions earlier this year.This one is interesting, and I invite you to take a close look: The employer does not have to extend the loan limits under the CRD rules, and the IRS has taken the position that the employer does not have to suspend the requirements that loan payments still be made even though both the statute and Notice 2020-50 state that the due date for loans payments through December 31, 2020 “shall” be delayed for one year. But the  Notice does not specifically address this issue of what happens when an employer fails to suspend, given the mandatory nature of the law.

What we are left with, I think, is something like this: assume that the participant fails to make a payroll-based loan repayment because they have short paychecks with insufficient funds to repay the required loan amount, yet the employer chose not to suspend the loan repayment rules. It would seem that, for tax purposes, there will not be a taxable deemed distribution, because CAREs extended that due date. However, if the plan, by its terms, forced a default because of this shortfall in payment- and then forced an offset of the participants account-it then becomes a taxable event. This loan offset then, it would seem, be treated as a CRD distribution which has the waiver of the 10% penalty, a 3year ratable taxation and the right to rollover the amount back into the plan.

Got it?

With this blog, we take the next step into the Podcast world, where we describe  the CARES impact Length of Service Awards programs (called “LOSAPs) under 457(e)(11). The Podcast is more extensive than the written word below, and I recommend you give it a try. I also rant a bit on it about  current state of confusion in the implementation of the CRD rules.  Listen to the Podcast here. It’s only about 7 1/2 minutes long.

First, what is a LOSAP? It a retirement type of arrangement under 457(e)(11). They act as a sort of gratuitous payment arrangement which local fire districts adopt under either state or local laws the deferral of a payment of up to $6,000 per year for volunteers providing fire fighting and prevention services, emergency medical services, and ambulance services. They really are odd programs, a sort of amalgamation of a number of different rules. Cheryl Press authored a very useful PLR on these programs, which I invite you to review. I’m also providing a link to one of the leading LOSAP programs which is available nationally, at LOSAP.com

So now, as COVID-19 inexorably moves out of the large cities to smaller and rural communities, it is these volunteers who will be faced with the extraordinary tasks arising from handling people affected by the virus. These volunteer departments have minuscule budgets, and are unlikely to have the resources to get all of the equipment they will need to handle COVID.

It follows that these volunteers will be impacted, some seriously so.

The typical LOSAP will permit a withdrawal for “unforeseen emergencies.” Yet the new CARES Act distribution rules provides no relief for these distributions. The CARES Act does not allow the tax on LOSAP distributions to be spread over three years, like it does for the tax on distributions from other kinds of retirement plans. There is also no ability for the firefighter to repay the amount of those distributions back to the plan, as the CARES Act allows to be done for other types of retirement plans.

LOSAPs have existed under the radar for years. But these volunteers are about to be in the forefront now, and so will their LOSAP programs.

Listen to the LOSAP Podcast here.

If you prefer to LISTEN to this blog as a podcast, go to our new Podcast player to listen, this one is 10 minutes long.  We are introducing our new podcast site soon.  Let us know what you think!

We know that all parties involved in plan administration are struggling with the question of whether the employer or the participant have the CARES Act rights to 1) an extension of loan amounts (I think it’s the employers choice); 2) the right to suspend loan repayments (I think it’s the participants right, not the employers-can you imagine the ramifications of an employer choosing  a taxable default and 10% penalty, even if by default?); 3) the right to take a non-restricted CRD distribution (again, I think it’s the participant’s choice); and 4) the right to non-RMD treatment (again, I think it’s the participants choice and the tax impact is automatic).

But beyond these difficult questions (yes, I admit to getting my two cents in on each of these points) is the application of ERISA’s fiduciary rules to the determination of the status  of a participant as being eligible for CARES’ relief (let’s call it a COVID participant).

You are eligible to be a COVID participant (thus eligible for the relief) if:

  1.  you are diagnosed with the virus;
  2.  your spouse or dependent is diagnosed with such virus, or
  3. (in the exact words of the statute)are  “an individual 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 25 operated by the individual due to such  virus or disease, or other factors as determined by the Secretary of the Treasury.”

I think we would all agree that the determination of whether or not an individual qualifies as a COVID participant would usually be  a determination that requires the exercise of discretion by a fiduciary, under ERISA Section 3(21).

As you also know, however, the CARES’ participant certification rule adds an odd twist into the mix:

“EMPLOYEE CERTIFICATION.—The administrator of an eligible retirement plan may rely on an employee’s certification that the employee satisfies the conditions of (the above rules)  in determining whether any distribution is a coronavirus-related distribution.”

Here’s where the problem seems to come in:  there is a bit of ambiguity in the third condition of eligibility: nowhere does it specifically mention the impact of the loss of employment or reduction in hours of the spouse of the participant in the calculation of what are the causes of the participant’s adverse financial circumstances.

Consider the following scenarios:

Case #1. A participant is still employed but has a reduction in hours which reduces her pay so she can’t make the rent. This clearly is an “adverse financial consequence,” and, as long as she certifies to this, she will get a Coronavirus related distribution (CRD)-along with the 3 years spreading of tax, the right to repay, and a waiver of the 10% tax penalty.

Case #2. A participant is still fully employed, is working at home due to a state order; but her husband has lost his job. They now cannot afford the rent, and she suffers an adverse financial consequence-indeed, she will have no place to work if they lose their apartment. She certifies that she has an adverse financial circumstance from being quarantined. Does the plan pay, as a CRD? There is a bit of contention on this point.

A few things to think about when answering that question:

  • A fiduciary doesn’t need to make that determination of COVID status. It is entitled to rely on the certification. Note that the statute does not impose even a “reasonable basis” or any other such standard.
  • Yet, directing payments out of a plan is still a fiduciary act, even with the certification. Only fiduciaries can authorize the payment of these funds.
  • The DOL has long held that the fiduciary has the obligation to override a participant’s decision, if it is imprudent. So isn’t the real question, then, whether or not the fiduciary should reject the participant certification?

Here’s where ERISA may be useful, absent guidance from the Treasury or the DOL. The fiduciary must act

with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.

Wouldn’t a fiduciary who relies upon the certification of the participant be judged by this standard? When you apply “under the circumstances then prevailing” standard, would not a fiduciary be hard pressed to challenge the certification especially given the pandemic and the remedial nature of the statute?

A fiduciary who challenged the certification based on the lack of specific spousal language in the statute will be faced with some hurdles. It would be denying a benefit, and would need to defend that through the ERISA claims and appeals process. Then the severe consequences of challenging the certification-and denying the certification- should also give a fiduciary pause. Denying it means that the participant may then not even be able to access the funds to prevent eviction.  Or even if that person is “lucky” enough to qualify for a typical hardship while still being employed:

  • there is a mandatory tax withholding of 20% on the withdrawal, so more funds will need to be withdrawn to make the rent payment;
  • the withdrawal will be fully taxed next April, at a time where there still may be financial struggles in recovering from this mess;
  • it is subject to the 10% penalty tax; and
  • the losses are permanent, as there is no right to repay those withdrawals to the plan.

It would seem that given the high stakes and the exacerbation of a participant’s adverse circumstances which would be caused by the denial, a fiduciary would be hard pressed to reject the certification.

A reasonable case could be made that the fiduciary not reject such a certification. But this decision is not without some risk: the IRS could claim-if Treasury fails to clarify the position, or fails to exercise its authority to “fill in” the missing spousal language under its authority granted under the statute,  that the CRD under these circumstances  was either a plan document or an operational error. That “error” would then need to be fixed under EPCRS, including VCP. That is the risk.

Somehow, it is difficult to accept that the IRS would dictate a correction under EPCRS which would force the return of the CRD or the treatment of the CRD as a standard hardship withdrawal under these circumstance.

None of this is easy. All of this is heartbreaking. And very real.

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!


This blog has been updated by a June 22 post found by clicking here

The structure and the language used by the drafters of the CARES Act in their crafting of the new participant loan repayment suspension rules seem to be both rare and stunningly broad: they appear to actually mandate, as a matter of federal law, that each loan repayment due through December 31, 2020  by COVID qualifying participants be suspended for one year. Interestingly enough, the language does not appear to prevent  ongoing loan repayments from being made should the participant choose to do so-the plan just may not be able to impose a due date on those payments from COVID participants. And, as a practical matter, the need for the COVID participant to self certify status as such  may actually turn this into an elective exercise on the participants behalf.  A challenge for administrators is how you accommodate the suspension with the desire to permit repayments at the same time?

The suspension is actually a big deal. Section 2202(b)(2) of the CARES act, which mandates the suspension, did not fool with the amortization schedules, or the timing and taxation of defaults under  Section 72(p) of the Tax Code, which is the section which governs the tax aspects of loans. In fact, it did not even amend Section 72(p) at all.  Nor did it amend any part of ERISA Section 408(b)(1), which hold the ERISA rules governing loans.

No, it avoided technical changes to either of these statutes and went instead went to the heart of things: it actually appears to legally modify the loan agreement between COVID participants and the plan.

Remember the actual legal structure of the participant loan: it must be a legally enforceable agreement between the plan and the participant, on commercially reasonable terms. When a participant signs a loan application (electronically or otherwise), that person agrees to the terms of that loan contract (which is reflected in the plan’s loan policy). To do what CARES did, that is to actually change the “pay date” of the loan under that legally enforceable agreement, that agreement must somehow be changed. This change can be accomplished in one of 3 ways: mutual agreement by the participant and the plan to amend the terms of the agreement (which would take forever to do); (2) unilateral action by the plan, if it so had the right to do so under its loan documents (which is highly unlikely); or (3) a law mandated change.

This suspension of payments is a law- mandated change. But here’s the very curious thing about the change: these particular contracts are enforceable under state law, not federal law, and those contracts can clearly be changed as a matter of state law. But how does federal law now step in to mandate this change otherwise reserved to the states?

One way it seems to works is by way of the ERISA preemption clause, ERISA Section 514.  ERISA will preempt state laws insofar as they “relate to” any ERISA-covered employee benefit plan. One of the three elements that the Courts have recognized as fulfilling the “relates to” preemption standard is any law which  “binds employers or plan administrators to particular choices or precludes uniform administrative practice, thereby functioning as a regulation of an ERISA plan itself.” (See New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 658-660 (1995)). This type of change seems to fall well within this rule, giving Congress the right to change a participant loan agreement.

So keep all this in mind when detailing your approach to the loan suspension: your underlying loan policy contract appears to have been changed by federal law. Yes, the payment section of the loan policy will need to now be eventually changed, pursuant to the plan amendment clause of that section of CARES,  but note that the amortization schedules in the Code did not actually change (note also that, interestingly,  CARES did not actually change  the language of 72(p) or 408(b)(1) when dealing with the $100,000 limit and the 50% rule). You will also need to discover a way to handle volitional payments, I would think, as well. But this analysis does leave open the question on how a non-ERISA loan can be modified by federal law. I would hope that the general clauses in those loan agreements  may well be able to be read broad enough to reasonably being able to incorporate this change…..

A side note on 403(b) plans: though this rule change is going to be a nightmare to administer for payroll based 401(k) and 403(b) loan programs, the legacy 403(b) “policy”loan program will be served nicely by this rule-it almost makes me think that the drafters of these rules had these participants in mind when drafting the law. The typical 403(b) policy loan is “self-billed,” that is, the participant actually mails in (or has deducted from their bank account) every month or every quarter  their loan payment. The participant just needs to stop making those payments, and the insurer just needs to prevent the loan’s default (and then figure out how to deal with the new re-amort schedule adding in the interest accrued during the suspension).

A Note of Caution: These thoughts are only applicable to the  repayment delay rules, not to the increase of loan limits. Though I may cover that in another blog, it appears that the increase in loan limit is volitional on behalf of the sponsor, IMHO.