Participant Loan & Disability

[R. Butler]

Participant takes a loan, a few months later takes a leave for disability. My understanding is that loan payments can be suspended for 1 year for a bona fide unpaid leave of absence.

I am being told that because the person has a disability we must suspend repayments indefinitely (the 1 year limit not applicable.) They reason that we cannot ever default the loan because cannot take anything away from a participant on disability per ADA and other related laws.

I doubt that they are correct, but I just am hoping to verify since I'm not up on all the ADA or any other disability laws.

Thanks in advance for any guidance.

[FundeK]

You have probably read Treas. Reg 1.72(p)-1, Q&A-9, but I thought I throw it out there anyway. It specifically states the loan repayments can be suspended for one year if not on military leave. It never mentions anything about disability allowing the loan payments to be suspended for greater than one year.

What exactly are you taking away from the participant by defaulting the loan? The right to repay the loan?

[R. Butler]

You have probably read Treas. Reg 1.72(p)-1, Q&A-9, but I thought I throw it out there anyway. It specifically states the loan repayments can be suspended for one year if not on military leave. It never mentions anything about disability allowing the loan payments to be suspended for greater than one year.

I agree that can suspend for 1 yr for a bona fide unpaid LOA.

What exactly are you taking away from the participant by defaulting the loan? The right to repay the loan?

I really don't know, they are concerned with the taxation if repayments don't resume at the end of the 1 year. It makes no sense to me, but they pretty adament so I'm at least going to look into it a little bit.

[FundeK]

I know you posted for answers, but I have a couple of questions (hope you don't mind) How long can you leave a person on disability before considering them terminated and giving the a termination date. Also, when a participant goes on long term disability aren't they considered terminated? I guess in my experience, after one year, the ER would put the person on long term disability and give us an official termination date. The termination would be a distributable event at which point the loan would be offset against the participants account.

I did read through the some final loan regs and found nothing about a loan repayments being suspended beyond one year in any circumstance other than military leave; therefore, I would deem the loan if the participant does not have another distributable event.

[R. Butler]

How long can you leave a person on disability before considering them terminated and giving the a termination date. Also, when a participant goes on long term disability aren't they considered terminated? I guess in my experience, after one year, the ER would put the person on long term disability and give us an official termination date.

I tend to agree with the 1 year. In this Plan if physician determines employee can't return to meaningful employment for 12 months. He is disabled & we have a distirbutable event.

The termination would be a distributable event at which point the loan would be offset against the participants account.

Not necessarily, the loan document can provide for continued repayment after termination.

I did read through the some final loan regs and found nothing about a loan repayments being suspended beyond one year in any circumstance other than military leave; therefore, I would deem the loan if the participant does not have another distributable event.

I agree.

Its not known how long this guy is going to be gone for yet. Whenever an employee leaves on an unpaid leave of absence, at the request of the employer we send them a letter to the participant explaining the 1 year suspension rules. In this particular case an individual in our office is questioning the applicability of the provision to a disabled person. I don't find any support for their position, but I always try to check anytime there is a disagreement.