401(k) loan: Leave of absence

[Guest FAQ]

The new final 401(k) loan regulations allow a participant to suspend loan payments for up to one year while on leave of absence. However, "the suspension of payments cannot extend the term of the loan beyond 5 years." Treas. Reg. 1.72(p)-1 Q/A-9(a). I understand that participants can either increase their payments when they return or make one large payment at the end of the loan term to make up for the missed payments during the leave.

Question. Suppose a participant takes out a loan with a 3 year term. After 2 years he goes on a leave of absence and stops making payments for one year, at which point he returns to work. Upon return, can the sponsor and participant agree to extend the term of the loan for one year (total loan term is now 4 years -- still less than the 5-year limit), or must the participant pay the entire balance at the end of the original 3-year term (when the leave ends and he returns to work)?

The regulation seems to indicate that the term of a loan that comes due while on leave of absence can be extended (up to 5 years), but is unclear as to whether the original term must be reinstated upon return to work. By contrast, the proposed regulation for military leave is clear that the original term of the loan can be extended by the period of military service. Prop. Reg. §1.72(p)-1 Q/A-9(B).

Two potential problems I see are the level amortization requirement (although the dollar amount of the payments could remain the same upon returning to work, the term would be extended from 3 to 4 years), and the possibility that extending the term could be a refinancing that should satisfy the proposed refinancing reg's in order to have comfort.

Thanks in advance for any thoughts on this.