SCP or VCP to Extend Permissible Loan Term

[EBECatty]

I've seen a few prior threads on this but wanted to get current input.

A plan's loan policy allowed 15 year loans for primary residences. Loans longer than 15 years (but assume still reasonable) were made. Plan sponsor is fine with amending the loan policy to allow longer primary residence loans (both for outstanding and future loans).

Section 6.07 of EPCRS (including current version now in 2018-52) allows for correction of loans in violation of 72(p)(2)(B) and (C), but here the primary residence exception applies and allows for a reasonable loan term. No violation of (B) or (C). VCP would seem to be required, but 6.07 only mentions correction by re-amortizing, which isn't the plan sponsor's preferred course because the original term is permissible under 72(p).

I suppose the alternative is to retroactively amend to conform to prior operations under the more generic VCP provisions of Section 4.05. 

Section 2.07 of Appendix B allows certain retroactive amendments under SCP. Section 2.07(2) allows a retroactive amendment under SCP to add loans to a plan whose terms did not allow them. But it does not mention amending under SCP to extend the term of an otherwise permissible loan. 

Is VCP required to retroactively approve the longer term? if so, would Section 4.05 be the appropriate section? 

Try SCP and document file stating that extending the loan term seems more analogous to SCP under Appendix B? 

Thanks in advance. 

[Kevin C]

Are you sure this loan violates 72(p)?  The conditions that must be satisfied to not have the loan be considered a distribution are in 1.72(p)-1 Q&A 3.  Surprisingly, there is no requirement that the loan be in compliance with the plan terms. 
 

Quote

 

Q-3: What requirements must be satisfied in order for a loan to a participant or beneficiary from a qualified employer plan not to be a deemed distribution?

A-3: (a) In general. A loan to a participant or beneficiary from a qualified employer plan will not be a deemed distribution to the participant or beneficiary if the loan satisfies the repayment term requirement of section 72(p)(2)(B), the level amortization requirement of section 72(p)(2)(C), and the enforceable agreement requirement of paragraph (b) of this Q&A-3, but only to the extent the loan satisfies the amount limitations of section 72(p)(2)(A).

(b) Enforceable agreement requirement. A loan does not satisfy the requirements of this paragraph unless the loan is evidenced by a legally enforceable agreement (which may include more than one document) and the terms of the agreement demonstrate compliance with the requirements of section 72(p)(2) and this section. Thus, the agreement must specify the amount and date of the loan and the repayment schedule. The agreement does not have to be signed if the agreement is enforceable under applicable law without being signed. The agreement must be set forth either—

(1) In a written paper document; or

(2) In a document that is delivered through an electronic medium under an electronic system that satisfies the requirements of §1.401(a)-21 of this chapter.

 

There is an operational failure because the terms of the plan/loan program were not followed.  While a literal interpretation of Appendix B 2.07 would be that correction by amendment would not be allowed in your situation, Section 6.02(2) says "If a plan has a different but analogous failure to one set forth in Appendix A or B (such as the failure to provide a matching contribution by a governmental plan that is not subject to §  401(m)), then the analogous correction method under Appendix A or B is generally available to correct any failure. "  I think that gives you at least a strong argument that you should be able to self correct via a retroactive amendment to the loan program.

There IS a requirement under 2550.408b-1(a)(1)(iii) that the loan must be in accordance with the plan provisions regarding loans to qualify for the PT exemption for participant loans.  The DOL website lists "Participant Loans Failing to Comply with Plan Provisions for Amount, Duration, or Level Amortization" as one of the failures eligible for correction under VFCP.

[EBECatty]

Thanks. I agree there's no violation of 72(p), just an operational failure.

The DOL VFCP program says the correction for this particular failure is to correct through the IRS VCP program:

(2) Correction of Transaction. Plan Officials must make a voluntary correction of the loan with IRS approval under the Voluntary Correction Program of the IRS' Employee Plans Compliance Resolution System (EPCRS).

I like the idea of this being an "analogous" failure to the one eligible for self-correction under Appendix B. I'm leaning toward self-correction, but I guess then again you don't get DOL relief.

[Kevin C]

Quote

2550.408b-1(a)(3)(ii) For the purpose of this regulation, the term “loan” will include any renewal or modification of an existing loan agreement, provided that, at the time of each such renewal or modification, the requirements of section 408(b)(1) and this regulation are met.

So, does that mean if the loan program is amended and the loan agreement is modified  in compliance with the new loan program, that the revised loan will then qualify for the PT exemption and no longer be a PT? 

Would the excise tax on the PT be less than the VCP filing fee?