IRS updates issue snapshot on affiliate loans

The IRS on September 28th updated the problem snapshot It discusses the laws and regulations governing planned loans.

Many retirement plans allow participants to borrow against their retirement accounts, although it is not required, the IRS reminds. Qualified plans that meet the requirements of Code Section 401 (a), retirement plans that meet the requirements of Section 403 (a) or 403 (b), and government plans as defined in Section 72 (p) (4) (B) Provide loans; IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRA plans cannot offer loans.

Enforceable agreement requirement

An affiliate loan must be a legally enforceable agreement (which may contain more than one document) and the terms of the agreement must demonstrate compliance with the requirements of Section 72 (p) (2) and Treasury. Registration number. §1.72 (p) -1. Therefore, the contract must include the amount and date of the loan, as well as the repayment schedule. The agreement does not need to be signed if the agreement is enforceable under applicable law without signature. However, the agreement must be recorded in a written paper document or in a document delivered over an electronic medium under an electronic system in accordance with Treas. Registration number. §1.401 (a) -21.

Loan Amount Limits

Section 72 (p) (2) (A) provides that the amount of a participant loan, when added to the outstanding balance of all other loans to the participant from all of the employer’s plans, is the lesser of:

  • $ 50,000 less the excess, if any, of the highest outstanding credit balance from the plan during the one-year period ending the day before the loan was granted over the outstanding credit balance from the plan on the date the loan was granted, or
  • The bigger one of:
    • 50% of the participant’s vested benefits; or
    • $ 10,000.

Section 2202 (b) (1) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (PL 116-136) changes the dollar limit for loans that are on or after February 27, 2020. These loans increase the upper limits according to Section 72 (p) (2) (A) as follows:

  • the total limit of 50,000 USD increases to 100,000 USD and
  • the total amount of the loan limit increases from 50% of the participant’s vested benefits to 100%.


According to § 72 (p) (2) (B), the repayment period of the plan loan is limited to five years, unless the loan is to be used to purchase a residential unit that will be used as the main residence of the participant within a reasonable period of time.

Section 72 (p) (2) (C) requires substantially constant repayment over the life of the loan, with payments no less than quarterly. However, this does not apply if a participant is on leave of absence for a year or less, but the loan (including the interest accruing during the leave of absence) must be repaid by the last permissible term of the loan and the amount of the installments due after the end of the leave may not be be less than the amount required by the terms of the original loan. The payment amount must be adjusted to ensure that the loan will still be repaid in five years.

Code Section 414 (u) provides a repayment exception for those in active military service. The plan can suspend the obligation to repay a loan for the duration of active military service without defaulting on the loan if payments are resumed after active military service has ended. If the obligation to repay a loan is based on active military service, the repayment period can be extended by five years.

A Qualified Person loan repayment due date that occurs between March 27, 2020 and December 31, 2020 will be postponed for one year in accordance with Section 2202 (b) (2) of the CARES Act. Subsequent repayments of the loan are to be adjusted to the default and the interest accruing during the default. When determining the 5-year period and the term of the loan according to §§ 72 (p) (2) ((B) and C), the delay period is not to be taken into account.

If the plan decides to apply the provisions of the CARES Act, the plan document must be updated. The change must be accepted on or before the following days:

  • the last day of the first plan starting on or after January 1, 2022, or
  • a later date can be determined by the treasurer.

Considered distributions

A participant loan or part of it is deemed to have been distributed for tax purposes if it:

  • exceeds the maximum dollar amount;
  • Has payment plans that do not meet time or payment requirements; or
  • is in default if payments are not made.

An assumed distribution occurs when one of the above requirements in terms of form or function is not met for the first time. This may be the case at the time the loan is granted or at a later date.

In three cases, the entire loan is deemed to be an accepted distribution on the loan grant date:

1. The loan terms violate the repayment deadline requirements of Section 72 (p) (2) (B),

2. The loan terms violate the depreciation requirements of section 72 (p) (2) (C) or

3. There is no legally enforceable agreement in the sense of Treas. Registration number. §1.72 (p) -1 Questions and Answers-3 (b).

An assumed distribution of an amount that differs from the original loan amount can occur if:

1. the loaned amount exceeds the limits of § 72 (p) (2) (A), then the amount by which the loan exceeds the limits is deemed to be a distribution.

2. If the participant has not made an installment payment by the due date in accordance with the loan terms, the amount of the outstanding loan balance plus accrued interest is deemed to be the distribution.

Fixing bugs

If a participant fails to make an installment when it is due, the plan may include a “grace period” that cannot extend beyond the last day of the calendar quarter following the due date of the required installment.

The CARES Act provides that plans can introduce certain special rules for qualified individuals in relation to the overall limits of the plan loans and the repayment terms. Pursuant to CARES Act and IRS Notice 2020-50, which implements portions of it, a Qualified Person is any person diagnosed with COVID-19 – or whose spouse or dependent has been diagnosed – or who has been diagnosed as a result of COVID. negative financial consequences -19 pandemic.

Action steps

The IRS provides the following tips to help you identify a potential problem and prepare for an audit.

  • Review the plan document and / or loan policy to ensure that the plan is working in accordance with Section 72 (p).
  • Review the pending affiliate loan documents. Records that contain the required information may include, but are not limited to, loan agreements, promissory notes, spouse consents, and home purchase documents.
  • Determine whether a loan should be considered an accepted distribution. Factors to consider include failure to meet the maximum amount, amount of depreciation, or Treas’s enforceable agreement requirements. Registration number. Section 1.72 (p) -1.
  • Examine all Forms 1099-R for dividends deemed to be dividends to ensure they were issued for the tax year in which the subscriber did not correct the deficiency by the end of the healing period that resulted in the assumed dividend.
  • Look for evidence of fraud.

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