Are plans required to suspend loan payments for military/non-military leaves of absence?

[Guest M. Martin]

Are Employers required to allow for suspension of participant loan payments during military or non-military leaves of absence? Much of the language I have read refers to “if a plan permits” so does this imply that the suspension may be an optional provision in the loan policy? The final loan regulations stipulate that re-payments may be suspended without violating 72(p) but what if an employer's intent is for a person on LOA to continue making the payments while they're out?

Our loan policy addresses both types of leaves and allows an employer to choose whether or not payments can be suspended in either situation. I haven't been able to locate any specific language in the Regs. that says it must be done or if it is clearly optional.

Thanks!

[Guest Bob K]

The Prototype and Volume Submitter Plans that I work with have the suspension of loans for military service as an "optional" item. Check it and you can suspend repayments. Leave it blank and you can not.

Since these documents are pre-approved by the IRS I assume it matches the regulations.

[MGB]

It is optional.

However, note there was a new law in December 2003 that affects this. If you continue payments and need to adjust the interest rate down to 6%, you may not reamortize the loan, nor may you continue to require the same payments that previously were in effect. You must downward adjust EACH PAYMENT individually for the difference between 6% and the old rate. That causes an increasing payment pattern, rather than a level payment pattern under a reamortization or continuation of the old amount.

[Guest M. Martin]

We are using Corbel documents and under the loan section it is silent regarding the suspension of loan payments. The document states that the Administrator will establish separate written loan program as part of the Plan.

In reviewing the questions and answers under Reg § 1.72(p)-1, Q-9 is worded a little different for a regular leave of absence vs. a military leave in that it doesn't have wording indicating "if a plan" suspends payments. By stating that a level amortization does not apply it does this mean that this is not an optional provision?

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.

(b) Military service. In accordance with section 414(u)(4), if a plan suspends the obligation to repay a loan made to an employee from the plan for any part of a period during which the employee is performing service in the uniformed services (as defined in 38 U.S.C. chapter 43), whether or not qualified military service, such suspension shall not be taken into account for purposes of section 72(p) or this section. Thus, if a plan suspends loan repayments for any part of a period during which the employee is performing military service described in the preceding sentence, such suspension shall not cause the loan to be deemed distributed even if the suspension exceeds one year and even if the term of the loan is extended. However, the loan will not satisfy the repayment term requirement of section 72(p)(2)(B) and the level amortization requirement of section 72(p)(2)© unless loan repayments resume upon the completion of such period of military service and the loan is repaid thereafter by amortization in substantially level installments over a period that ends not later than the latest permissible term of the loan

[Harwood]

My Corbel document has a section "Qualified Military Service" which says "loan payments may be suspended as permitted under Code Section 414(u)(4).'

[Guest M. Martin]

Mine does as well, thank you for pointing this out. Any thoughts on if suspensions are optional for a regular leave of absence?

[Harwood]

Since the military leave suspension-of-payments provision is optional [something I learned today], it looks like the 12-month regular LOA suspension provision is optional as well.

The Plan would declare its rules in their loan policy section on "the events constituting default . . ."

[Guest M. Martin]

I found the following in The ERISA Outline Book, Chapter 7, that confirms leave of absence suspensions are optional:

7. Plan provisions must specific requirements for loans. Loans can be made to participants only if the plan contains a provision authorizing the loan, or the plan authorizes the adoption of a separate written loan policy and such policy is adopted by the fiduciary or fiduciaries with authority to do so. See DOL Reg. 2550.408b-1(d). The issues discussed in this Part C regarding renegotiations or modifications of a loan, and extensions for leaves of absence, are not available unless included in the plan provisions (or written policy).

7.a. Plan terms may be more restrictive. The repayment requirements discussed above set maximum payment terms and minimum amortization requirements in order to avoid tax consequences under IRC 72(p). They are not requirements for plan design purposes. A plan may be more restrictive in establishing repayment conditions for participant loans. The plan might require loans to be payable in less than five years, or to be amortized more frequesntly than on a quarterly basis (e.g. amortization on a payroll withholding basis).

I hope this is helpful to all and thanks for your input.