Plan loan question

[Guest blaum8]

Plan sponsor inadvertently made residential participant loan (permitted under plan) with a 30 year term instead of 15 year specified in plan doc. The single loan is insignificant both in terms of asset size of the plan and the number of "proper" loans outstanding.

Plan sponsor wants to retroactively amend plan to allow 30 year loans as a self-correction. Under EPCRS, retroactive plan amendment is not available for plan loans under SCP. Amendment is available under VCP, but client wants to stay under IRS radar and avoid time and expense of VCR filing.

Loan reamortization is not available under plan, and affected participant cannot afford repayment and accelerated repayment schedule under a 15 yr. loan.

How risky is doing a retroactive amendment under SCP, even though it isn't "technically" permitted under Rev. Proc. 2003-44 (EPCRS)? Are there any other options available to the plan sponsor?

[Belgarath]

I have no direct experience with the IRS on such a circumstance, so I'm giving an uninformed opinion.

If you assume the plan is never audited, then there's no risk in leaving as is. If you assume that the plan will be audited at some point, and are concerned that the IRS would pick up the original loan transaction as impermissible, then it seems to me you only exacerbate the problem by using an impermissible "fix" so that you now have two problems instead of one.

Hopefully someone with specific experience with this type of situation can give you more constructive input!

[david rigby]

With respect to "audit", it appears the prior response was focusing on IRS. However, if the plan is subject to independent audit, it seems likely that loans will be a topic of scrutiny (with an IRS audit as well). My guess is that the independent auditor will find this discrepancy.

Plan should obtain ERISA counsel.