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Loan Payment Delay


austin3515
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So I have been playing with amortization schedules to try and figure out what it would look like taking into account the suspension.  After playing with it a little bit it became clear (to me anyway) that essentially what you would do is:

1) Accumulate interest until the 1/1/2021.

2) Figure out the payment to pay it off to zero by the end of the 6 year term. If the participant, pre-suspension, had a larger payment then just start that larger payment.  If its a new loan and they want to pick a higher dollar amount then let them.

I know the statute talks about suspending the payments and resuming them after a 1 year delay and then amortizing, etc.  I tried to play around with all of it and the differential in the payments each way I tried it was minimal.  Payments are essentially only being delayed for 9 months, but we get an extra year to pay it off.

I attahed my amortization schedule.  If someone has a different take on how this works let me know. 

 

Am Sched.pdf

Austin Powers, CPA, QPA, ERPA

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I don't think you get an extra year to pay off the loan. The CARES Act Section 2202(b)(2)(C) states "In determining the 5-year period and the term of the loan under subpar (B) and (C) of Section 72(p)(2), the period descried in subpar (A) of this paragraph shall be disregarded." I read this to mean the one year delay is disregarded in determining the maximum permissible term of the loan. I think this means the participant still has to pay off the loan within 5 years of the loan's original date.

This is the same treatment accorded loan payment suspension during a leave of absence. 

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That is not correct, the are very clear that the 5 year term is now 6 years.

 (C) in determining the 5-year period and the term of a loan under subparagraph (B) or (C) of section 72(p)(2) of such Code, the period described in subparagraph (A) of this paragraph shall be disregarded.

It says that 12 month period is DISREGARDED for the 5 year max.  That means you get 6 years to repay.

But for some reason no one is talking about this. i can't believe no one is talking about how this actually works.  I can;t even get the recordkeepers to answer the question.

Austin Powers, CPA, QPA, ERPA

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I think it has been discussed.  As I recall, somebody posted a spreadsheet.  When re-commenced, you re-amortize over the period that ends 1 year after the original 5 year period ended. 

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Doesn't "disregarded" mean that the one year period is not counted in determining the permissible loan periods under IRC Section 72(p)(2)? Your reading of the Act's provisions seems to be that the term "disregarded" means that the one year period is counted. Maybe I don't understand what the word "disregarded" means.

As I noted earlier, my understanding is that this provision applies in the same manner as leaves of absence.  The plan may also suspend loan repayment during a leave of absence of up to one year ... However, upon return the participant must make up the missed payments either by increasing the amount of each monthly payment or by paying a lump sum at the end so that the term of the loan does not exceed the original five year term.

I'd like to be wrong here.

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13 minutes ago, JRN said:

Doesn't "disregarded" mean that the one year period is not counted in determining the permissible loan periods under IRC Section 72(p)(2)? Your reading of the Act's provisions seems to be that the term "disregarded" means that the one year period is counted. Maybe I don't understand what the word "disregarded" means.

I have a loan that originated on July 1, 2019. The loan ends on June 30, 2024.

I am a qualified individual, and starting on April 1, 2020 I take advantage of the 1-year delay. My next payment is due April 1, 2021.

As of April 1, 2020, before applying the provisions of CARES, I had a maximum term of 4 years, 3 months left to finish paying off my loan. Under CARES, the period of time between April 1, 2019 and March 31, 2019 is disregarded with respect to the 5-year limit of 72(p)(2)(B). Therefore, As of April 1, 2021, I still have 4 years, 3 months left to finish paying my loan. Therefore my final due date is now June 30, 2025.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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10 hours ago, Mike Preston said:

I think it was you.  I'm not one of the 10 people that have downloaded it, to date.  Hardly time sensitive.

It is time sensitive though. Clients need to know how this will work before they sign up for it and allow it. Whether paymetns a) commence on 1/1/2021, and b) have to be increased on some subseuqent date after the 12 month delay is a critical question.  Systems have to be in place, etc.

Austin Powers, CPA, QPA, ERPA

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I mentioned Notice 2005-92 in a thread yesterday. While it's not CARES Act guidance, it interprets the exact same statutory language in KETRA from 2005. This is also from Section 5(b) of the notice:

"The loan repayments must resume upon the end of the suspension period, and the term of the loan may be extended by the duration of such suspension period. If a qualified employer plan suspends loan repayments during the suspension period, the suspension will not cause the loan to be deemed distributed even if, due solely to the suspension,
the term of the loan is extended beyond five years
."

It also addresses, among other things, the DOL's agreed non-enforcement of the adequate security requirement for plan loans and eligibility, distribution, and re-contribution rules for Katrina distributions, the statutory language for which mirrors the coronavirus-related distributions almost precisely. 

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10 hours ago, JRN said:

I'd like to be wrong here.

Good news, you are wrong.  If the rules were the same as leave of absence then this legislation would be moot.  Disregarded means it doesn;t count.  So the 12 months between now and pril 2021 are DISREGARDED for the 5 year rule.  That means if you are 2 years in today, you are 2 years as of April 2021.

Austin Powers, CPA, QPA, ERPA

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On 4/2/2020 at 9:45 PM, C. B. Zeller said:

I have a loan that originated on July 1, 2019. The loan ends on June 30, 2024.

I am a qualified individual, and starting on April 1, 2020 I take advantage of the 1-year delay. My next payment is due April 1, 2021.

As of April 1, 2020, before applying the provisions of CARES, I had a maximum term of 4 years, 3 months left to finish paying off my loan. Under CARES, the period of time between April 1, 2019 [sic 2020] and March 31, 2019 [sic 2021] is disregarded with respect to the 5-year limit of 72(p)(2)(B). Therefore, As of April 1, 2021, I still have 4 years, 3 months left to finish paying my loan. Therefore my final due date is now June 30, 2025.

I'm still struggling with this and will use the CBZ example to illustrate how I am reading these provisions.

2202(b)(2)(A) indicates payments occurring during the period ending 12/31/2020 are delayed for 1 year. So in the example, I would think it is only the payments due April 1, 2020 through 12/31/2020 are delayed for 1 year. The scheduled payments for January 1, 2021 through March 31, 2021 are not delayed and due as scheduled. Then April 1, 2021 the loan amortization schedule is recalculated after the interest accrued from April 1, 2020 through December 31, 2020 is added to the outstanding balance as of April 1, 2021, and the loan term is extended by 9 months (as (C) disregards the "period" described in (A) not the "delay" ).

While this seems reasonable to me, I am happy to be redirected if I'm not headed in the right direction.

Thank you! 

 

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2 hours ago, MDCPA said:

I'm still struggling with this and will use the CBZ example to illustrate how I am reading these provisions.

2202(b)(2)(A) indicates payments occurring during the period ending 12/31/2020 are delayed for 1 year. So in the example, I would think it is only the payments due April 1, 2020 through 12/31/2020 are delayed for 1 year. The scheduled payments for January 1, 2021 through March 31, 2021 are not delayed and due as scheduled. Then April 1, 2021 the loan amortization schedule is recalculated after the interest accrued from April 1, 2020 through December 31, 2020 is added to the outstanding balance as of April 1, 2021, and the loan term is extended by 9 months (as (C) disregards the "period" described in (A) not the "delay" ).

While this seems reasonable to me, I am happy to be redirected if I'm not headed in the right direction.

Thank you! 

 

That is how we are reading it as well - and frankly, it's causing some consternation in that once payments resume (1/1/2021) the "system" won't know where to apply that payment (the default is the longest outstanding missed payment - which would be the April 2020 payment(s)) and then miraculously on 4/1 everything changes due to re-amotization.

By the way, there is some chatter that "each" payment due in 2020 is defered for a year (i.e. April 2020 => April 2021, May 2020 -> May 2021, etc.)  I can't imagine how that could be administered (reamortizing every month as payments deferred come due) and we don't believe it is what was intended.

How are others dealing with this?

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CARES 2202(b)(2)(B): any subsequent repayments with respect to any such loan shall be appropriately adjusted to reflect the delay in the due date under subparagraph (A) and any interest accruing during such delay.

I take this to mean that all of the payments subsequent to the first delayed payment are adjusted under this subparagraph.

From a practical standpoint you essentially just insert a year into the amortization schedule with no payments. Payments stop between April 1, 2020 and March 31, 2021, then resume on the normal schedule, increased for interest and for the extended term of the loan, on April 1, 2021.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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11 minutes ago, C. B. Zeller said:

From a practical standpoint you essentially just insert a year into the amortization schedule with no payments. Payments stop between April 1, 2020 and March 31, 2021, then resume on the normal schedule, increased for interest and for the extended term of the loan, on April 1, 2021.

Except the Act specifically says only payments due in 2020 can be deferred.  How do you justify deferring next January's (and February's...) payments until April 2021?

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The act specifically says any subsequent repayments shall be adjusted to reflect the delay in the due date. It does not say only subsequent repayments with due dates occurring in 2020.

 

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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3 minutes ago, C. B. Zeller said:

The act specifically says any subsequent repayments shall be adjusted to reflect the delay in the due date. It does not say only subsequent repayments with due dates occurring in 2020.

 

So then you need to re-amortize effective with the payments due in January of next year - not starting in April, since you can't "defer" that January payment(s) and it is a "subsequent payment" that needs to be adjusted....

Playing devils advocate here - but these are the issues being surfaced....

I prefer your approach, but....

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Has anyone looked at my amortization schedule in the original post?  If there is another way to do this I would be curious.  It is so hard to follow this conversation without seeing amortization schedules.  At the end of the day the question boils down to “what will the amortization schedule look like?”

Austin Powers, CPA, QPA, ERPA

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31 minutes ago, MoJo said:

So then you need to re-amortize effective with the payments due in January of next year - not starting in April, since you can't "defer" that January payment(s) and it is a "subsequent payment" that needs to be adjusted....

It's not "subsequent" if it's due before the delayed payment.

Going back to my earlier example, and using monthly payments. Payment #10 was originally due April 2020. It is delayed by 1 year under CARES. It is now due April 2021.

According to the amortization schedule, payment #n+1 is due 1 month after payment #n. Therefore, after adjusting as required under CARES 2202(b)(2)(B), payment #11 is due May 2021, #12 is due June 2021, etc. Payment #19, which was originally due January 2021, is now due January 2022. 

Under your interpretation, if I'm understanding correctly, you would say that Payment #19 remains due January 2021. That would be before the due date of payment #10, which is the payment that was originally delayed. This is a logical contradiction, you can't have payment #19 due before payment #10. That would make #19 your actual 10th payment, meaning that the participant did not receive the full 1 year delay afforded under CARES.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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29 minutes ago, C. B. Zeller said:

It's not "subsequent" if it's due before the delayed payment.

Going back to my earlier example, and using monthly payments. Payment #10 was originally due April 2020. It is delayed by 1 year under CARES. It is now due April 2021.

According to the amortization schedule, payment #n+1 is due 1 month after payment #n. Therefore, after adjusting as required under CARES 2202(b)(2)(B), payment #11 is due May 2021, #12 is due June 2021, etc. Payment #19, which was originally due January 2021, is now due January 2022. 

Under your interpretation, if I'm understanding correctly, you would say that Payment #19 remains due January 2021. That would be before the due date of payment #10, which is the payment that was originally delayed. This is a logical contradiction, you can't have payment #19 due before payment #10. That would make #19 your actual 10th payment, meaning that the participant did not receive the full 1 year delay afforded under CARES.

Yes, it is subsequent if it is due in January 2021, and the payment deferred is April 2020.  Are you saying that it isn't subsequent to the LAST payment deferred (in your scenario, March 2021), and if so, how do you get to that determination within the language of the CARES Act.  Explain to me how you consider a January 2021 payment as being deferable under the CARES Act.

 

I'm just reading the text which says you can defer payment DUE in 2020.  It says NOTHING about deferring a payment DUE in January 2021....

 

Please prove me wrong!  I prefer your approach, but my background says that's now how you interpret statutes.

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1 minute ago, austin3515 said:

while I'm sure your interpretation is correct, can we all agree that the treatment is impractical?  Also, I believe the statute calls for a reamortization of the delayed payments at some point.  

I agree - but do you re-amortize as of 1/1/2021 (because you must to make it work), or do you wait until 4/1/2021 and do it, and do you not start payments again 1/1/2021.

 

I agree that my interpretation is impractical - but show me how to interpret it otherwise.

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"I agree that my interpretation is impractical - but show me how to interpret it otherwise."

When I tried to follow the statute as closely as possible what I found was that the payments only shifted a de minimis amount.  The statute says to reamortize - not to double payments in 12 months.  If you take any reasonable approach at reamortizing you're going to find the payments don't change by much at all. Hence my approach is a very close approximation of what the statute says.  Go ahead and try it, you'll see what I mean.

Austin Powers, CPA, QPA, ERPA

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