Interest Accrual Application If Loan Is Paid in Full During Cure Perio

[Guest andmik]

Hello,

My question revolves around the final loan regulations and the application of the interest accrual on a deemed distribution.

Example: Participant takes a $10,000 loan for 5 years with a 90 day Cure Period. After 6 months, participant terminates employment on September 1st. The outstanding loan balance on Sept. 1st is $8,000. The Loan Policy provides a 90 day Cure Period to pay back loan in full, otherwise the loan will be offset (due to separation of service creating a distributable event and allowing an account offset).

If on November 30th the loan is not repaid, the regulation is clear that the offset (or deemed distribution if not a distributable event) will be $8,000 + accrued interest through November 30th, and a 1099-R for that total amount will be generated for taxation purposes.

My Question: If during the Cure Period (let's say October 20th) the participant decides to pay back to the plan the loan amount, the question the regulations do not clearly answer is whether the participant need only pay the $8,000 outstanding on September 1st, or must he pay $8,000 + accrued interest through October 19th, under the regulation, in order to fully pay the loan back during the Cure Period.

The regulation does not appear to be clear on whether it is required to apply the interest accrual through the date of payment (Sept. 1 - Oct 20) if payment is actually made during the Cure Period. Any insight will be appreciated.

Thank you,

Andmik