Loan Repayments/Payroll Cycle Change

[whitboston]

Company is changing it's payroll cycle from semi-monthly to bi-weekly. For the outstanding loans, we need to re-amoritize the payments to reflect this change.

Do we need to issue new loan paperwork to all loan participants since the actual frequency and loan payment amount will change? The other terms of the loan will not change.

Any thoughts/comments are appreciated.

[ERISAnut]

Company is changing it's payroll cycle from semi-monthly to bi-weekly. For the outstanding loans, we need to re-amoritize the payments to reflect this change.

Do we need to issue new loan paperwork to all loan participants since the actual frequency and loan payment amount will change? The other terms of the loan will not change.

Any thoughts/comments are appreciated.

I wouldn't change it. In two months out of the year, the employees will receive 3 paychecks (instead of two). For these months, I would not deduct a loan repayment from the 3rd payroll. If you do this, then everything is left consistent. You are simply moving from 24 paydates to 26. All other months will remain the same instead of two. Don't do anything drastic.

[whitboston]

Company is changing it's payroll cycle from semi-monthly to bi-weekly. For the outstanding loans, we need to re-amoritize the payments to reflect this change.

Do we need to issue new loan paperwork to all loan participants since the actual frequency and loan payment amount will change? The other terms of the loan will not change.

Any thoughts/comments are appreciated.

I wouldn't change it. In two months out of the year, the employees will receive 3 paychecks (instead of two). For these months, I would not deduct a loan repayment from the 3rd payroll. If you do this, then everything is left consistent. You are simply moving from 24 paydates to 26. All other months will remain the same instead of two. Don't do anything drastic.

Client does not want the responsibility of remembering not to deduct a payment. They have 17 loans outstanding and some of them will not end for 4 more years. Any other thoughts. I agree we don't want to do anything drastic.

[Archimage]

I agree with NUT's recommendation on this one. However, if the client does not want to do it this could be a great revenue generating project for you.

1. You will have to amend the plan doc/loan policy to allow for re-financing if it isn't already available.

2. You will have to prepare all new loan paperwork for the re-finance.

They may possibly change their mind when you tell them what your fee would be to accomplish this project.

[pmacduff]

I don't think you need a complete set of new loan forms, but what about a one page amendment to each loan specifying that the Company changed payroll frequency and what the new per payroll amount will be? Perhaps also add a line that no other terms of the original loan application and forms were changed. Then have each participant sign off?

[ERISAnut]

I would simply retrofit the loan to the new payroll schedule. Just reamortize based on the current number of payments remaining to the revised number of payments remaining through the end of each loan. This will keep the payments equal.

A simple notice to the partcipants should suffice. This shouldn't be a major show stopper, but merely an issue of what the client finds more convenient. I wouldn't even see where a participant's signature would be a requirement since the payments will remain level and consistent thoughout the term of each loan. A notification of what to expect would seem appropriate however since they will automatically get notified of the change in the pay schedule.

[JanetM]

We do this all the time and have never considered it to be refinanced loan. We just adjust the amount of loan payment and notify the participant.

Since our loan rules and promissory note say the loan will be paid back via payroll deduction in X number of payments over X number of months, if the pay frequency changes the loan payment will aslo change.

[ERISAnut]

We do this all the time and have never considered it to be refinanced loan. We just adjust the amount of loan payment and notify the participant.

Since our loan rules and promissory note say the loan will be paid back via payroll deduction in X number of payments over X number of months, if the pay frequency changes the loan payment will aslo change.

I agree. This is a common process.

[WDIK]

If the payment frequency and amount change, so that they no longer reflect what is stipulated in the promissory note, why would it not be necessary to make those changes in the loan paperwork as well?

[E as in ERISA]

It's not technically a refinancing if you are not increasing the principal amount or interest rate or extending the term of the loan. So it shouldn't be a plan document issue. There will be more payments, but in lower amounts. So ideally contemplates that by having the terms focused on the principal and interest rate and providing some leeway in regard to the frequency and size of payments.

[JanetM]

WDIK, we send them a note explaining the change in amount and telling them they can get a amortization schedule if they want one. Most folks are just happy knowing the amounts and that the payoff dates won't change.

We have folks who go betweem semi-monthly (salary) and weekly (hourly) all the time, in addition to the semi-monthly and biweekly changes.

Promissory note does have a line regarding that - payment amount subject to change in the event payment frequency changes.

[WDIK]

Thanks for the clarification. I'm comfortable with that.

[Mike Preston]

I agree with the majority opinion that this is a "no big deal" and that the course of action should be a simple notification to participants with a method for them to obtain a new amortization schedule.

Just one word of caution: the rules require that the date of the last payment of the loan under the new schedule not be later than the last payment that would have been allowed had the original loan been made for a 5 year period (in the case of a loan not for the purchase of a residence).

Take a person whose 5-year loan is currently scheduled for a final payment on 12/31/2008. If you find yourself with Friday paychecks such that your last payroll in 2008 falls on December 19 and that the next payroll is January 2, you must ensure that the last payment on the new schedule is made on December 19, 2008, not on January 2, 2009.

If you reschedule the loan such that the last payment is to be made on January 2, 2009, I think the IRS could rightfully say that you extended the loan beyond the 5-year repayment cycle and that the full extent of the loan became taxable when the reamortization was initiated.... sometime in 2006.

I know this seems ticky-tack, but it is really a simple matter to ensure that this rule is followed.