Loans and Leave of Absence

[Guest PensionPerson]

A participant took a loan in 9/02 and then went on workman's comp. The loan term was for 3 years. The regs allow for a one year leave of absence on loan repayments with installments and loan terms equal to the intial loan at the time the loan repayments start again. Is it possible to extend the loan repayments to the 5 year maximum as long as the repayments begin after one year and installments remain the same? Does anyone have experience with this? Can the one year leave of absense be extended for cases under FMLA?

[jaemmons]

The only extension, that I am aware of, to the 12 months is for military leave under USERRA. After a leave of absence (non-military) a loan may be reamortized to the latest permissible time limit, which for non-residential loans, would be five years from the date the loan was taken. Even though the original loan was for three years, the loan can still be extended to five years following the leave of absence, without violating IRC 72(p). The ony catch is that the new loan repayment must be no less than the original loan repayment amount. See below.

§1.72(p)-1 Loans treated as distributions.

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A-9: (a) Leave of absence. The level amortization requirement of section 72(p)(2)© does not apply for a period, not longer than one year (or such longer period as may apply under section 414(u) and paragraph (b) of this Q&A-9), that a participant is on a bona fide leave of absence, either without pay from the employer or at a rate of pay (after applicable employment tax withholdings) that is less than the amount of the installment payments required under the terms of the loan. However, the loan (including interest that accrues during the leave of absence) must be repaid by the latest permissible term of the loan and the amount of the installments due after the leave ends must not be less than the amount required under the terms of the original loan.

[Kirk Maldonado]

jaemmons:

Are you saying that a participant could not renegotiate a loan for a longer repayment period?

[jaemmons]

No. From my interpretation of the regulation, they can extend the loan term to the maximum period allowable (which depends on the type of loan it is), without having to include the loan as a distribution under 72(p), as long as the new installment payment isn't less than the original installment payment.