Plan Distributions with Furloughs and Terminations Apr 26

401(k) Plans and COVID-19: Frequently Asked Questions About

Plan Distributions

As businesses have employee furloughs or terminations or as employees incur medical expenses from contracting COVID-19 there are likely to be requests by participant for access to their account balances.  Here are the common requests we have been getting:

• Can a terminated participant take a loan from our plan? No, only active participants may take a loan.
• If a furloughed employee has taken a loan does it go into default while they are furloughed? The IRS allows employees on a bona fide leave of absence to stop making loan payments if:
  • The furlough period must not exceed one year
  • The loan must be repaid by the end of the original term of the loan. The payments missed during the furlough period can be repaid with a balloon payment of the missed payments at the end of the loan or by increasing the remaining payments over the remaining loan payment.
• Is there a special hardship distribution allowed because of COVID-19? If your plan allows hardship distributions, a participant with a principal place of business or residence in a state that FEMA declares a major disaster area, may obtain a hardship for expenses or losses incurred due to COVID-19. As of today, only three states have been declared a major disaster area:  New York State, California and Washington State.

Are There Any Possible Changes To These Rules?

Tax on Early Withdrawals. The most recent version the Coronavirus, Aid, Relief and Economic Security (CARES) Act has a waiver of the 10% penalty tax on early withdrawals up to $100,000 from a retirement plan or IRA for participants or their family members impacted by COVID-19. It also permits those individuals to pay tax due on the distribution ratably over a three-year period, as well as allowing them to repay that amount tax-free back into the plan over three years.

Increase in Loan Limits. The most recent version of the CARES Act doubles the current retirement plan loan limits to the lesser of $100,000 or 100% of the participant’s vested account balance in the plan. Retirement plans would also be permitted to adopt these rules immediately, even if the plan does not currently allow for hardship distributions or loans.

Change in Loan Default Date.  The American Retirement Association, on behalf of its nearly 28,000 individual members who provide consulting and administrative services to sponsors of retirement plans, has requested of the IRS that plan sponsors be able to change the date of the default on a loan from the date of termination to later date that is not earlier than June 30, 2020.  This is so that a participant is not penalized if they are rehired.