Defer first loan repayment

[Guest mmullen]

A participant is going to be on medical leave for six months for surgery, and is wondering if he can take a plan loan, but not start repaying it for six months. Is it allowable to make the first repayment date six months in the future?

[QDROphile]

Do the circumstances give the fiduciary cause to question whether or not the loan will be repaid?

[Belgarath]

By the terms of the loan, no. Payments must be made at lest quarterly.

From a practical standpoint, and depending upon the specific dates involved, it might be possible to get close to this as a net effect. If there is a "cure period" it cannot extend later than the end of the calendar quarter following the calendar quarter in which the missed payment is due. So if the loan date is January 2, and the first quarterly payment is due, say, April 2, then your cure period could extend no later than September 30, which is the end of the calendar quarter following the calendar quarter in which the default occurred.

I'm not advocating this! Especially since it could be determined that this wasn't a bona fide loan, although I'm a little dubious that it would be taken that far unless it was an owner that they (IRS/DOL) wanted to nail for something else. But certainly possible. My answer would simply be "No, you can't do it."

[Guest mmullen]

A participant is going to be on medical leave for six months for surgery, and is wondering if he can take a plan loan, but not start repaying it for six months. Is it allowable to make the first repayment date six months in the future?

The fiduciary feels that this person will return to work and repay the loan as he needs to.

[JanetM]

Qualified leave of absense can suspend payments for one year.

Final regs - 72p1 - under Q&A

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.

© Latest permissible term of a loan. For purposes of this Q&A-9, the latest permissible term of a loan is the latest date permitted under section 72(p)(2)(B) (i.e., five years from the date of the loan, assuming that the replacement loan does not qualify for the exception at section 72(p)(2)(B)(ii) for principal residence plan loans) plus any additional period of suspension permitted under paragraph (b) of this Q&A-9.

(d) Examples. The following examples illustrate the rules of this Q&A-9 and are based upon the assumptions described in the introductory text of this section:

Example 1. (i) On July 1, 2003, a participant with a nonforfeitable account balance of $80,000 borrows $40,000 to be repaid in level monthly installments of $825 each over 5 years. The loan is not a principal residence plan loan. The participant makes 9 monthly payments and commences an unpaid leave of absence that lasts for 12 months. The participant was not performing military service during this period. Thereafter, the participant resumes active employment and resumes making repayments on the loan until the loan is repaid. The amount of each monthly installment is increased to $1,130 in order to repay the loan by June 30, 2008.

(ii) Because the loan satisfies the requirements of section 72(p)(2), the participant does not have a deemed distribution. Alternatively, section 72(p)(2) would be satisfied if the participant continued the monthly installments of $825 after resuming active employment and on June 30, 2008 repaid the full balance remaining due.

Example 2. (i) The facts are the same as in Example 1, except the participant was on leave of absence performing service in the uniformed services (as defined in chapter 43 of title 38, United States Code) for two years and the rate of interest charged during this period of military service is reduced to 6 percent compounded annually under 50 App. Section 526 (relating to the Soldiers' and Sailors' Civil Relief Act Amendments of 1942). After the military service ends on April 2, 2006, the participant resumes active employment on April 19, 2006, continues the monthly installments of $825 thereafter, and on June 30, 2010 repays the full balance remaining due ($6,487).

(ii) Because the loan satisfies the requirements of section 72(p)(2) and paragraph (b) of this Q&A-9, the participant does not have a deemed distribution. Alternatively, section 72(p)(2) would also be satisfied if the amount of each monthly installment after April 19, 2006, is increased to $930 in order to repay the loan by June 30, 2010 (without any balance remaining due then).

[Belgarath]

Thanks Janet! I didn't remember this at all. Time to go back and reread the regs. That's one of the things I like best about these boards - helps to keep you on your toes.