CARES Act – Retirement Plan Loans

By: Timothy Lynn

The CARES Act makes two significant changes with respect to retirement plan loans to help people with COVID-19 hardships.

Note that these provisions only affect an Qualified Individual, which is an individual who:

1. Is diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the CDC, or
2. Whose spouse or dependent is diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the CDC, or
3. Who experiences adverse financial consequences as a result of:
a. being quarantined,
b. being furloughed or laid off or having work hours reduced due to such virus or disease,
c. being unable to work due to lack of child care due to such virus or disease,
d. closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or
e. other factors as determined by the Secretary of the Treasury.

Under current law, the maximum amount that can be borrowed from a retirement plan without such loan being treated as a distribution is the lesser of $50,000 or one-half of the present value of the vested balance of the account. For 180 days from the enactment date of the CARES Act (on March 27, 2020 it was enacted as Public Law 116-136), the cap is changed for Qualified Individuals to the lesser of $100,000 or the present value of the vested balance of the account.

Furthermore, Qualified Individuals who have an outstanding retirement plan loan may defer any payments owed between March 27, 2020 and December 31, 2020, for a period of one year. Subsequent payments must be adjusted to reflect the delay in due date and interest that accrues during the delay. For determining the five year period of the loan, the deferral period is ignored.

The law also includes provisions permitting plans to adopt amendments to allow the withdrawals and loans permitted by Section 2202 of the CARES Act.