What happens if loan repayments are not suspended, and a participant fails to timely make loan repayments?
The timing for loan defaults and deemed distributions is automatic under the applicable rules and regulations, which means that a plan sponsor doesn’t have an option to keep the loan afloat. Assuming that an individual is not eligible for relief under the CARES Act, this would result in a taxable deemed distribution once repayments stop. If the participant is younger than age 59 1/2 , then a pre-mature distribution penalty will apply, unless an individual is considered an ‘qualified individual’ under the CARES Act.
Cetera Retirement Plan Specialists is a third-party administrator and may not offer tax, legal or investment advice. Plan sponsors should consult their own tax, legal or investment professionals.