77. Loans to participants

Statement of Requirement: Code §§ 72(p), 401(a)(13), 4975(d)(1), 4975(f)(6), 417(f)(5); Reg. §§ 1.401(a)-20, Q&A 24, 1.72(p)- 1; DOL Reg. § 2550.408(b)-1; Rev. Proc. 96-49, 1996-2 C.B. 369; Notice 2001-57; N otice 2020-50, 2020-28 I.R.B. 35

(Note to reviewer: A plan may provide for loans to participants or beneficiaries if it complies with the requirements of § 4975(d)(1) of the Code.)

Sample Plan Language:

(8) Loans shall be made available to all participants and beneficiaries on a reasonably equivalent basis.

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(9) Loans shall not be made available to highly compensated employees (as defined in section _____ of the plan) in an amount greater than the amount made available to other employees.

(Note to reviewer: The blank should be filled in with the plan section number corresponding to LRM #11.)

(10) Loans must be adequately secured and bear a reasonable interest rate.

(11) No participant loan shall exceed the present value of the participant's vested

accrued benefit.

(12) A participant must obtain the consent of his or her spouse, if any, to use of the

account balance as security for the loan. Spousal consent shall be obtained no earlier than the beginning of the 180-day period (90-day period for plan years beginning before January 1, 2007) that ends on the date on which the loan is to be so secured. The consent must be in writing, must acknowledge the effect of the loan, and must be witnessed by a plan representative or notary public. Such consent shall thereafter be binding with respect to the consenting spouse or any subsequent spouse with respect to that loan. A new consent shall be required if the account balance is used for renegotiation, extension, renewal, or other revision of the loan.

(13) In the event of default, foreclosure on the note and attachment of security will

not occur until a distributable event occurs in the plan.

(14) Loan repayments will be suspended under this plan as permitted under

§414(u)(4) of the Internal Revenue Code.

If a valid spousal consent has been obtained in accordance with (5), then, notwithstanding any other provision of this plan, the portion of the participant's vested account balance used as a security interest held by the plan by reason of a loan outstanding to the participant shall be taken into account for purposes of determining the amount of the account balance payable at the time of death or distribution, but only if the reduction is used as repayment of the loan. If less than 100% of the participant's vested account balance (determined without regard to the preceding sentence) is payable to the surviving spouse, then the account balance shall be adjusted by first reducing the vested account balance by the amount of the security used as repayment of the loan, and then determining the benefit payable to the surviving spouse.

(Note to reviewer: No spousal consent is required for the use of the account balance as security for a plan loan to the participant under a profit-sharing plan not subject to the joint and survivor and preretirement survivor annuity rules under §§ 401(a)(11) and 417.)

(Note to reviewer: Code § 72(p) provides that certain plan loans are treated as distributions. Compliance with § 72(p) is not required for plan qualification. Therefore, any plan provision dealing with § 72(p) will not be considered with

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respect to the issuance of a favorable opinion letter. However, some qualification requirements could be affected when § 72(p) is not satisfied. The following language is provided to assist Providers in drafting provisions to comply with § 72(p).)

No loan to any participant or beneficiary can be made to the extent that such loan when added to the outstanding balance of all other loans to the participant or beneficiary would exceed the lesser of (a) $50,000 reduced by the excess (if any) of the highest outstanding balance of loans during the one year period ending on the day before the loan is made, over the outstanding balance of loans from the plan on the date the loan is made, or (b) one-half the present value of the nonforfeitable accrued benefit of the participant or, if greater, the total accrued benefit up to $10,000. For the purpose of the above limitation, all loans from all plans of the employer and other members of a group of employers described in sections 414(b), 414(c), and 414(m) of the Code are aggregated. Furthermore, any loan shall by its terms require that repayment (principal and interest) be amortized in level payments, not less frequently than quarterly, over a period not extending beyond five years from the date of the loan, unless such loan is used to acquire a dwelling unit which within a reasonable time (determined at the time the loan is made) will be used as the principal residence of the participant. An assignment or pledge of any portion of the participant's interest in the plan and a loan, pledge, or assignment with respect to any insurance contract purchased under the plan, will be treated as a loan under this paragraph.

(Note to reviewer: Section 108 of the SECURE Act modifies § 72(p) by prohibiting loans through credit cards and other similar arrangements, effective for loans made after December 20, 2019. Plan language enabling loans through credit cards or another similar arrangement should be removed.)

(Note to reviewer: Section 2202 of the CARES Act permits an additional year for repayment of loans from eligible retirement plans and relaxes limits on loans. Under these rules, if a loan is outstanding on or after March 27, 2020, and any repayment on the loan is due from March 27, 2020, to December 31, 2020, that due date may be delayed under the plan for up to one year. Any payments after the suspension period will be adjusted to reflect the delay and any interest accruing during the delay. See section 5.B of Notice 2020-50 for guidance on implementing payment suspensions under this provision.

The CARES Act also permits employers to increase the maximum loan amount for plan loans made to eligible individuals from March 27, 2020, to September 22, 2020. The limit may be increased up to the lesser of: (1) $100,000 (minus outstanding plan loans of the individual), or (2) the individual's vested benefit under the plan. See section 5.A of Notice 2020-50.

The CARES Act loan rules are optional. An employer may choose whether, and to what extent, to amend its plan to provide for expanded loan administration. To the

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extent an employer chooses to provide coronavirus-related loans, the following sample plan language may be used.)

(Note to reviewer: See the CODA LRM for additional coronavirus-related relief provisions.)

Coronavirus-Related Loans

If elected by the Employer in the Adoption Agreement, a loan to a Participant or Beneficiary may be treated as a coronavirus-related loan. A coronavirus-related loan is a loan made from the Plan on or after March 27, 2020, and before September 23, 2020, to a qualified individual, as defined in section 2202(a)(4)(A)(ii) of the Coronavirus Aid, Relief, and Economic Security Act, Pub L 116-136 (CARES Act) and Section 1B of Notice 2020-50, which does not exceed the lesser of (a) $100,000 (reduced by the excess (if any) of the highest outstanding balance of loans during the one year period ending on the day before the loan is made, over the outstanding balance of loans from the plan on the date the loan is made), or (2) the individual’s vested benefit under the Plan and other retirement plans maintained by the Employer and Related Employers.

If a loan is outstanding on or after March 27, 2020, and any repayment on the loan is due from March 27, 2020, to December 31, 2020, that due date may be delayed under the Plan for up to one year. Any payments after the suspension period must be adjusted to reflect the delay and any interest accruing during the delay, and the period of delay must be disregarded in determining the 5-year period and the term of the loan under Code sections 72(p)(2)(B) and (C).

(Note to reviewer: The Plan Administrator may rely on an individual’s certification that they satisfy the conditions to be a qualified individual unless the Administrator has actual knowledge to the contrary. See section 5.C of Notice 2020-50.)

(Note to reviewer: Prior legislation lifted restrictions on plan loans to individuals whose principal place of abode was in a federally declared disaster area subject to legislative relief, and who sustained an economic loss because of the disaster. Legislation addressing specific disaster areas generally allowed new loans with a higher limit of $100,000 (or the full accrued benefit of the employee, if less), plus a one-year suspension of repayment due dates for loans to affected individuals that are outstanding on or within six months after the disaster, in addition to other relief. These provisions are optional and required enabling plan amendments limited to the disasters and date ranges specified in the legislation.

Recent legislation enacting temporary disaster-related loan relief includes:

• Section 502 of the Disaster Tax Relief and Airport and Airway Extension Act of 2017, Pub. L. 115-63, relating to 2017 Hurricanes Harvey, Irma and Maria, providing for new loans and suspension of payments for outstanding

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loans with due dates from September 29, 2017, to December 31, 2018 (dates vary by specific hurricane).

• Section 20102 of the Bipartisan Budget Act of 2018, Pub. L. 115-123, relating to California wildfires, providing for new loans from February 9, 2018, to December 31, 2018, and suspension of payments for outstanding loans with due dates from October 8, 2017, to December 31, 2018.

• Section 202 of the Taxpayer Certainty and Disaster Tax Relief Act of 2019, enacted as Division Q of the Further Consolidated Appropriations Act, 2020, Pub. L. 116-94, relating to federal disaster areas declared from January 1, 2018, to February 18, 2020, providing for new loans made from December 20, 2019, to June 16, 2020, and suspension of payments for outstanding loans with payments due up to 180 days from the end of the declared incident period.

• Section 302 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted as Division EE of the Consolidated Appropriations Act, 2021, Pub. L. 116-260, relating to federal disaster areas declared from January 1, 2020, to February 25, 2021; providing for new loans made from December 27, 2020, to June 24, 2021 (during 180-day period beginning on the date of enactment), and suspension of payments for outstanding loans with payments due up to 180 days from end of the declared incident period.

• Section 331 of the SECURE 2.0 Act added new Code § 72(p)(2)(6) to provide permanent disaster-related loan relief to individuals affected by qualified disasters. This provision is effective for loans related to federally declared disasters with an incident period beginning on or after January 26, 2021. See IRC §§ 72(p)(2)(6) and 72(t)(11)(E)-(F).)

Federally Declared Disasters

1. Definitions relating to Qualified Federally Declared Disasters under Code section

72(p)(6). These definitions apply to sections 2. and 3., below.

g. A qualified disaster is any disaster with respect to which a major disaster has been declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act after December 27, 2020.

h. The qualified disaster area with respect to any qualified disaster is the area with respect to which the major disaster was declared under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. However, any area which is included in a qualified disaster area solely by reason of section 301 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 is excluded.

i. The incident period of a qualified disaster is the period specified by the

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Federal Emergency Management Agency as the period during which the disaster occurred.

j. The applicable date for a qualified disaster is the latest of i) December 27, 2020, ii) the first day of the incident period with respect to the qualified disaster, or iii) the date of the disaster declaration with respect to the qualified disaster.

k. The applicable period with respect to a qualified disaster is the period beginning on the applicable date with respect to the disaster, and ending on the date that is 180 days after the applicable date.

l. A qualified individual with respect to a particular qualified disaster is any individual whose principal place of abode at any time during the incident period of the qualified disaster is located in the qualified disaster area with respect to such qualified disaster, and who has sustained an economic loss by reason of such qualified disaster.

5. Qualified disaster-related loans. For qualified disasters with an incident period for beginning on or after January 26, 2021, increased loan limits will apply to any Plan loan to a qualified individual made during the applicable period with respect to the disaster. The maximum disaster-related loan under this provision is the lesser of (a) $100,000 (minus the highest outstanding balance of loans from the Plan during the prior 1-year period), or (b) the individual’s full vested benefit under the Plan and other retirement plans maintained by the Employer and Related Employers.

6. Qualified disaster-related loan repayment suspension. For qualified disasters with an incident period beginning on or after January 26, 2021, if a loan to a qualified individual is outstanding on or after the first day of the incident period of the disaster, the due date for any repayment with respect to such loan that is due during the period beginning on the first day of the incident period, and ending on the date which is 180 days after the last day of the incident period, will be delayed under the Plan for one year. The period of delay will be disregarded in determining the term of the loan and the level of amortization under Code sections 72(p)(2)(B) and (C). Any payments after the suspension period will be adjusted to reflect the delay and interest accruing during the delay.

7. Temporary plan provisions for other federally-declared disasters. If elected by the Employer in the Adoption Agreement, a new loan to a Participant may be made, and payments on outstanding Plan loans may be suspended, in the event of a federally declared disaster that was declared on or before December 27, 2020, where resulting legislation or guidance authorizes such loans and payment suspensions. The Plan allows the following disaster-related modifications to the loan provisions in section ___ .

e. 2017 Hurricane Relief under Section 502 of the Disaster Tax Relief and Airport

and Airway Extension Act of 2017, Pub. L. 115-63. An individual whose

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principal place of abode on August 23, 2017 (Hurricane Harvey), September 4, 2017 (Hurricane Irma), or September 16, 2017 (Hurricane Maria) (the beginning date of the hurricane) was located in that hurricane’s disaster area and who sustained an economic loss by reason of that hurricane may obtain a disaster- related loan during the period beginning on September 29, 2017, and ending on December 31, 2018. The maximum permitted amount of this disaster-related loan is the lesser of (a) $100,000 (minus the highest outstanding balance of loans from the Plan during the prior 1-year period), or (2) the individual’s vested benefit under the Plan and other retirement plans maintained by the Employer and Related Employers. The due date for scheduled repayments on outstanding plan loans to qualified individuals with payment due dates during the period from the beginning date of the hurricane to December 31, 2018, is delayed for one year. Any payments after the suspension period must be adjusted to reflect the delay and any interest accruing during the delay, and the period of delay must be disregarded in determining the 5-year period and the term of the loan under Code sections 72(p)(2)(B) and (C).

f. California wildfire relief under Section 20102 of the Bipartisan Budget Act of

2018, Pub. L. 115-123. An individual whose principal place of abode during any portion of the period from October 8, 2017, to December 31, 2018, was located in the California wildfire disaster area and who sustained an economic loss by reason of the California wildfires may obtain a disaster-related loan during the period beginning on February 9, 2018, and ending on December 31, 2018. The maximum permitted amount of this disaster-related loan is the lesser of (a) $100,000 (minus the highest outstanding balance of loans from the Plan during the prior 1-year period), or (2) the individual’s vested benefit under the Plan and other retirement plans maintained by the Employer and Related Employers. The due date for scheduled repayments on outstanding plan loans to qualified individuals with payment due dates during the period beginning on October 8, 2017, and ending on December 31, 2018, is delayed for one year. Any payments after the suspension period must be adjusted to reflect the delay and any interest accruing during the delay, and the period of delay must be disregarded in determining the 5-year period and the term of the loan under Code sections 72(p)(2)(B) and (C).

g. Federally-declared disasters under Section 202 of the Taxpayer Certainty and

Disaster Tax Relief Act of 2019, enacted as Division Q of the Further Consolidated Appropriations Act, 2020, Pub. L. 116-94. An individual whose principal place of abode, during any portion of the incident period of a federally declared disaster declared during the period from January 1, 2018, to February 18, 2020, was located in the disaster area and who sustained an economic loss by reason of the disaster may obtain a disaster-related loan during the period

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beginning on December 20, 2019, and ending on June 16, 2020. The maximum permitted amount of this disaster-related loan is the lesser of (a) $100,000 (minus the highest outstanding balance of loans from the Plan during the prior 1-year period), or (2) the individual’s vested benefit under the Plan and other retirement plans maintained by the Employer and Related Employers. The due date for scheduled repayments on outstanding plan loans to qualified individuals with payment due dates during the period beginning on the first day of the incident period of such qualified disaster and ending on the date which is 180 days after the last day of such incident period, is delayed for one year (or, if later, until June 17, 2020). Any payments after the suspension period must be adjusted to reflect the delay and any interest accruing during the delay, and the period of delay must be disregarded in determining the 5-year period and the term of the loan under Code sections 72(p)(2)(B) and (C).

e.h .Federally-declared disasters under Section 302 of the Taxpayer Certainty and

Disaster Tax Relief Act of 2020, enacted as Division EE of the Consolidated Appropriations Act, 2021, Pub. L. 116-260. An individual whose principal place of abode, during any portion of the incident period of a federally declared disaster declared during the period from January 1, 2020, to February 25, 2021 (not including the coronavirus-related disaster), was located in the disaster area and who sustained an economic loss by reason of the disaster may obtain a disaster- related loan during the period beginning on December 27, 2020, and ending on June 24, 2021. The maximum permitted amount of this disaster-related loan is the lesser of (a) $100,000 (minus the highest outstanding balance of loans from the Plan during the prior 1-year period), or (2) the individual’s vested benefit under the Plan and other retirement plans maintained by the Employer and Related Employers. The due date for scheduled repayments on outstanding plan loans to qualified individuals with payment due dates during the period beginning on the first day of the incident period of such qualified disaster and ending on the date which is 180 days after the last day of such incident period, is delayed for one year (or, if later, until June 25, 2021). Any payments after the suspension period must be adjusted to reflect the delay and any interest accruing during the delay, and the period of delay must be disregarded in determining the 5-year period and the term of the loan under Code sections 72(p)(2)(B) and (C).

Sample Adoption Agreement Language:

Coronavirus-Related Loans

The Plan permits coronavirus-related loans from a Participant’s vested account balance to the extent permitted under the Investment Arrangement:

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___ Yes

___ No

Federally Declared Disaster Loans

The Plan permits qualified disaster-related loans from a Participant’s account in the event of a Federally declared disaster occurring on or after January 26, 2021:

___ Yes

___ No

The Plan permits disaster-related loans from a Participant’s account after the federally- declared disasters marked below:

___ Hurricanes Harvey, Irma and Maria (under Section 502 of the Disaster Tax Relief and Airport and Airway Extension Act of 2017, Pub. L. 115-63)

____ California wildfires (under Section 20102 of the Bipartisan Budget Act of 2018, Pub. L. 115-123)

____ Federal disaster areas declared from January 1, 2018, to February 18, 2020 (under Section 202 of the Taxpayer Certainty and Disaster Tax Relief Act of 2019, enacted as Division Q of the Further Consolidated Appropriations Act, 2020, Pub. L. 116-94)

____ Federal disaster areas declared from January 1, 2020, to February 25, 2021 (under Section 302 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted as Division EE of the Consolidated Appropriations Act, 2021, Pub. L. 116-260)

The Plan permits disaster-related plan loan payment suspensions after the federally- declared disasters marked below:

___ Hurricanes Harvey, Irma and Maria (under Section 502 of the Disaster Tax Relief and Airport and Airway Extension Act of 2017, Pub. L. 115-63)

____ California wildfires (under Section 20102 of the Bipartisan Budget Act of 2018, Pub. L. 115-123)

____ Federal disaster areas declared from January 1, 2018, to February 18, 2020 (under Section 202 of the Taxpayer Certainty and Disaster Tax Relief Act of 2019, enacted as Division Q of the Further Consolidated Appropriations Act, 2020, Pub. L. 116-94)

____ Federal disaster areas declared from January 1, 2020, to February 25, 2021 (under Section 302 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted as Division EE of the Consolidated Appropriations Act, 2021, Pub. L. 116-260)

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