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"Interest" During "Cure Period"


Guest cjk

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A plan allows for participant loans and also provides for the maximum "cure period" as provided for in the final regulations. The "cure period" ends on the last day of the quarter following the quarter during which the participant missed a loan repayment. In your opinion, does the regulations require that "interest" be accrued/applied on the missed loan repayment the is made prior to the end of the "cure period"? In my opinion, the regulations are not explicit in this regard. I believe that the regulations could be read either way, and that either way would be acceptable. On the other hand, the regulations are explicit in the situation where the participant does not make the missed repayment by the end of the "cure period" and the loan is labeled a "deemed distribution." The regulations explicitly state that the amount of the "deemed distribution" is the amount of the outstanding balance with interest applied through the end of the "cure period."

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The IRS 72(p) regulations only tell you how much of the loan has to be treated as taxable. It is the ERISA regulations that require that loans bear a reasonable rate of interest. So technically interest should continue to accrue at the stated rate during the cure (although I'm guessing that a lot of plans just use the original amortization schedule and don't update it for actual payments?).

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