What is the "date of the loan" for starting the 5 year repay

[Guest Bob Lees]

We have an internal auditor here and he is questioning if our loans are exceeding the 5 year maximum repayment limit. Here is an example of one of our loans he is questioning.

Participant requests loan 10/7/97, he receives check 10/21/97, his first payment is 11/2/98 and his final payment is 10/24/02. This exceeds the 5 year limit from 10/21/97 to 10/24/02.(These are not exact dates I just created to show the auditor questions)

Has anyone else ever had this problem. I tried to explain it was based upon payroll cycles and it just worked out this way. He did not miss any payments and they were all done by payroll deduction evrey two weeks. Do we need to adjust our loans to a 4 year 25 biweekly payment schedules?

Thank you.

[JanetM]

Back when I was doing plan work as a CPA for CPA firm- we explained the term of the loan - per IRS can not exceed five years.

Look at it like a car loan. You buy a car and take a 60 month loan. Your first payment is due 30 days after you drive off the lot - does that mean the term of the loan exceeded five years because you had a 30 day grace period - I say no.

Now that is what I learned the regs meant years ago - If someone can give me site for correcting the error of my ways I would appreciate it.

[E as in ERISA]

A lot of plans limit loan repayments to 58 months (just a little less than 5 years) to accomodate a lag of over a month or two between the signing of the paperwork (and/or the check) and the first payment. I think that is just to be safe since there is no guidance re what is five years. When in doubt I often recommend going with industry practice.

[Earl]

I, for one, have never met an irs auditor that would be able to figure out that 60 payments could be more than 5 years.

[Earl]

not to be mean or anything....

[mbozek]

The official IRS position as expressed in several plrs is that the loan is invalid at inception if the period for repaying the loan extends beyond 5 years from the date of the loan regardless of the reason. Thus if the last payment is scheduled to be paid 5 yrs and 1 week after the loan is made because of the payroll cycle the entire loan is deemed a distribution. How IRS auditiors discover such glitches unknown (I presume they would review a sample of loan applications and notes) but most employers insure that loans repayments are amortized over 58 or 59 months to avoid problems.

[maverick]

What is the "date of the loan" for starting the 5 year limit?

- date loan app is signed

- date amort is prepared

- date note is signed

- date check is delivered

- or???

Thanks.

[mbozek]

Participants usually sign the note at the same time as they recieve the loan- The note is the promise to repay the loan. Date of the note is usually the beginning of the 5 year period since that is the date that the ee incures the obligation to repay the loan. Loan period could commence on date note is signed even if procceeds are received at a later date. You really need to read the loan agreement/note.

[pmacduff]

The original thread referred to an "internal" auditor, not necessarily an "IRS" auditor. I have had many 5 year loans in my 13 year tenure as an administrator, and many of those plans and loans were IRS audited (one plan had 68 loans). In no instance did the IRS auditor make mention of the fact that a loan could possibly be as much as 30 days over the 5 year mark depending on when you measured. I would think the main concern of an audit would be to make sure the the loan follows the plan provisions, is being repaid according to the amortization schedule/loan paperwork and falls within the qualified plan loan guidelines in the regs. I think someone here is getting alittle paranoid....

[E as in ERISA]

Problems with a plan loan result in taxation to the participant, not disqualification of the plan. Therefore, they aren't particularly going to be on the employee plans auditors' radar screen. The question would be whether the agents who audit individuals have the 72 rules on their radar screen. Probably not?

But I wouldn't want to be the person who messed up if the CEO or CFO got audited and they got taxed on an extra $50,000 just because there was no 58 month rule.

[2muchstress]

At one of the ASPA annual conferences in DC (I believe it was 1999) an IRS agent gave the opinion that the date of the loan was the date the check was issued and that the repayment period could not exceed 5 years beyond this date. Though it was just his opinion and doesn't hold much authority, I have always tried to structure loans with this in mind. Sometimes it means amortizing a loan over 129 bi-weekly payments instead of 130.

Practically speaking, if a loan goes over by one pay-period, I don't think that this is an area of concern.

[Trekker]

This is five years after the original question, but I have a cite that might help. I have not looked at the cite, but it is a footnote to an article in a 2001 issue of the Tax Management Compensation Planning Journal.

The article states that: "If there are required periodic payments, the first of which is due to be made within two months of the date the loan was made, the five-year repayment period will be measured from the due date of that first payment."

The cite: Joint Committee on Taxation, General Explanation of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA Blue Book), Sec. IV.D.2.