Calculating Plan Loan Limits under the CARES Act: Application of the One-Year Lookback

The Coronavirus Aid, Relief, and. Economic Security (CARES) Act temporarily increases the plan loan limit for loans to qualified individuals (as defined below) from defined contribution plans, such as 401(k) plans and 403(b) plans. This is generally good news for employees, but care should be taken when plan sponsors and plan recordkeepers calculate the loan limit because the one-year “lookback” continues to apply.

Under the CARES Act, plan loans made to qualified individuals during the period beginning on March 27, 2020, and ending on September 23, 2020, are limited to the lesser of:

  • $100,000 reduced by the excess of:

    a. the employee’s highest outstanding loan balance from the plan (and from any other plan of the employer or its controlled group members) during the one-year period ending on the day before the loan is made, over

    b. the employee’s outstanding balance of any loan from the plan (or from any other plan of the employer or its controlled group members) on the date the loan is made, or

  • 100% of the participant’s vested account balance.

Many plans allow participants to have only one plan loan outstanding at a time. For example, an employee who took a $45,000 loan on October 1, 2019, might wish to repay that loan in order to take a new loan under the higher limit of the CARES Act. Because the employee had a $45,000 loan outstanding during the prior one-year period, the employee’s new loan would be limited to $55,000 ($100,000 minus the $45,000 loan taken on October 1, 2019).

A similar result occurs for plans that allow participants to have two loans outstanding at a time. For example, an employee who took a $45,000 loan on October 1, 2019, might wish to take a second loan due to the higher limit of the CARES Act. Because the employee had a $45,000 loan outstanding during the prior one-year period, the employee’s second new loan would be limited to $55,000 ($100,000 minus the $45,000 first loan taken on October 1, 2019).

A “qualified individual” for these purposes is someone who has been diagnosed with the virus SARS-CoV-2 or the coronavirus disease 2019 ( COVID-19); whose spouse or dependent has been diagnosed with COVID-19; or who experiences adverse financial consequences stemming from COVID-19 as a result of being quarantined, furloughed, laid off, having reduced work hours, being unable to work due to lack of child care, the closing or reduction of hours of a business owned or operated by the individual, or other factors as determined by the Department of the Treasury.