CARES Act Conformity for Qualified Employer Plans in California
On September 11, 2020, Governor Newsom signed Assembly Bill 276 (“AB 276”), amending California’s tax law regarding the taxation of loans from qualified employer benefit plans to employees. The amendments track the provisions of the federal CARES Act on this issue, bringing much-needed uniformity between California and federal law governing this issue.
California and federal law have long allowed qualified employer benefit plans to provide non-taxable loans to plan participants and beneficiaries under specified circumstances. AB 276 amends California’s conditions for treating such loans as non-taxable to match the conditions of federal law, which were recently changed by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
Pre-existing California law limited the amount and duration of loans that would be considered non-taxable. The amount was limited to the lesser of: (1) the greater of $10,000 or 50% of the participant’s vested account balance; or (2) $50,000. The duration was capped at five years.
The CARES Act revised federal law regarding the amount and duration of loans that could be treated as non-taxable for loans made during the 180-day period beginning on March 27, 2020. The act raised the maximum amount to the lesser of: (1) the greater of $10,000 or 100% of a participant’s vested account balance; or (2) $100,000. The act also provides the repayment period for such loans for up to one year.
These changes substantially increase both the amount and duration of loans that may be considered non-taxable. However, the increased limits apply only to loans taken during the 180-day period after March 27, 2020. That period ends Wednesday, September 23, 2020.