Loan Repayments while laid off?

[Guest Michael Anderson]

We have a contruction company that routinely lays off ee's for about 4 months in the winter. What are the rules about loan repayments during this time? Thanks

[Harwood]

Some employers consider similar temporary layoffs to be a "leave of absence" for loan repayment purposes. Consult ERISA counsel to be sure.

[Kirk Maldonado]

Although I never advise against retaining ERISA counsel, the first step is to look at the loan documents to see if they address this issue.

[Guest Michael Anderson]

The loan documents address the default time period, but not the issue of a participant being laid off with the full intent of being rehired. How would I get in contact with the ERISA counsel if I need to? Thanks.

[FundeK]

See Treas Reg. 1.72(p)-1 Q9, which is what I used when writing may FAQs. Here is how I answered this question in the FAQs I wrote.

Q38: What happens to a participant’s loan when the leave of absence ends?

A38: When the participant’s leave ends or after one year if sooner, the participant must repay the outstanding balance of their loan including interest that accrued during the leave by the latest permissible date allowed under IRC § 72(p)(2)(B) (i.e., 5 years from the date of the original loan, unless it is a primary residence loan). If the original term of the loan was for less than five years the IRS will allow the loan to be extended to 5 years. However, the new payment cannot be less than the original loan payment amount. If the original loan term was 5 years, the schedule may not be extended. Below are the repayment options:

Option 1: Reamortize the loan for the remaining term so that the remaining loan balance plus accrued interest are repaid (note: The amount of the installments cannot be less than the original loan payment).

Option 2: Resume making the normal payment amount and make a balloon payment at the end of the loan term for the remaining balance.

Option 3: Make a lump sum payment for the missed payments and accrued interest, and then resume the normal payment amount.

[Kirk Maldonado]

Michael Anderson:

Send me an e-mail message. I may know of an ERISA attorney in your area of the country (depending on where you are located).