Loan - repayment starting date question

[Belgarath]

Wow, the strange stuff keeps popping up this week! So it has been proposed that a participant loan be granted, with payroll deduction repayments, but with a twist.

Let's say loan is granted on, pick any day, January 15th. But the (equal) payroll deduction repayments are not scheduled to begin until March 15th. The repayment schedule would be 4 years - well under the 5 year limit.

To me, this violates the "substantially level payments" made at least quarterly requirement of 72(p)(2)(C). During quarter 1 of the loan, the repayment is far less than during subsequent quarters.

Since I'm questioning my sanity this week (cold medicine creating more fog than usual) I thought I'd see if it's just me, or if folks agree. Thanks.

[Bird]

Did this happen to come from PlanPremier TPA?  I literally just got done figuring out why their amortization amount was different from ours.  It is truly bizarre, and told them so.

But I don't think it is a problem from the "level" standpoint - "level payments" and "payments at least quarterly" are two separate and distinct issues.

[Belgarath]

Nope. Just a question from a client.

[Mike Preston]

I'm having a hard time understanding what you think is the problem.  The payment made in the first quarter (1/15 through 4/14) is the same as the payment in the last quarter, isn't it?

[Belgarath]

My worry was that the payment made during the first loan quarter would be less than in subsequent quarters. Let's use a more extreme example to illustrate my concern, and just assume a once-monthly payroll, on the last day of the month. Loan date is January 1. They propose to have first payment due on March 31. Payment amount is $500.00 per payment - and the payments (all made within the 4 year period, calculated from January 1, 2018) work out to, say, $500.00 per month. This amount takes into account the interest accrued from January 1 to March 31.

So the first level payment is $500.00 - which represents the total payment being made during the first quarter of the loan. Second quarter has 3 monthly payments - total of $1,500.00. That was my worry.

[Mike Preston]

I thought you were describing a circumstance where the quarterly payments were 60 days delayed, not a circumstance where the bi-weekly payments were 60 days delayed.  Don't have time to research it now but my algebraic angel who oversees my subconscious is telling me it should be OK because otherwise ANY loan whose first payment is delayed more than the payment interval would fail.  No?

[Bird]

Rephrasing what I said earlier, "'"substantially level payments' made at least quarterly" is not the same thing as "substantially level quarterly payments."  I think it's ok whether it is done over 4 years or 5 years, as long as the 5 year payments are scheduled to be done before the fifth anniversary.  But good grief, why would anyone want to complicate this so?  If it's a cash flow problem for the first payment or two, just schedule it normally but let them be 'late" (but not so late that the loan defaults).

[Belgarath]

Thanks all. This was helpful!