Loans -- Leave of Absence

[Archimage]

In order to suspend loan payments during a leave of absence, does the plan doc/loan policy have to address this? I have this situation now and the loan requirements are very vague and do not address a leave of absence.

[FundeK]

According to Sal's book, "extensions for leave of absences are not available unless included in the plan provision (or written policy). However, when I read Reg 1.72(p)-1, it leads me to believe that it does not necessarily need to be in the loan policy, but is always applied.

Q- 9. Does the level amortization requirement of section 72(p)(2)© apply when a participant is on a leave of absence without pay?

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.

This probably hasn't helped much at all (sorry). Our standard loan policy does include leave of absence language that is very specific.

[Archimage]

That is the exact same thing I found and I could not decipher it either.

[FundeK]

I found this in Sal's 2002 edition too. Chapter 7, Section IX (9) "If an employee goes on a leave of absence, will the loan payment obligation be suspended? The §72(p)regulations establish some conditions for loan suspensions due to leaves of absence, in order to avoid tax consequences under §72(p). See Part C.5. and Part C.6. of this section. The plan™s loan program must set the parameters for loan suspensions. In addition, the plan might provide for less flexibility with respect to loan suspensions that the §72(p) regulations permit."

He is of the opinion that it must be in the loan program. Of course, there is no cite for his opinion. You probably already saw this too, but I thought I would throw it out there anyway.

[R. Butler]

Couldn't the loan document just be amended to avoid the issue? Does the plan sponsor want to allow refinancing or is the Sponsor trying to avoid allowing refinancing?

[Archimage]

No, refinancing is not the issue. The sponsor wants to be sure the plan is administered correctly. After a little more research I have concluded that the doc would have to allow for payments to be suspended for a leave of absence.

[R. Butler]

After a little more research I have concluded that the doc would have to allow for payments to be suspended for a leave of absence.

Are you saying that you have determined that loan document must specifically provide for it? Did you have a cite or anything? I'm kind of curious myself now.

[Archimage]

I cannot find any specific regs. The regs do not even clearly define a leave of absence. I looked at a couple of prototypes that gave the option of whether to allow for suspension or not. This just leaves me to conclude that it should be clearly written in the loan policy.

I could also see the point of view from the other side too though.