Plan Loan -- Change from monthly payments to bi-weekly payments

[Guest boecar]

Employer has several hundred loans outstanding from qualified retirement plan. Employer is changing its payroll practices, and will switch from monthly payroll to bi-weekly payroll.

Plan loans were issued with amortization schedule reflecting monthly loan payments. In the future, employer would like to have plan loan payments made from each bi-weekly paycheck.

Employer's concerns include (i) the requirement of Code section 72(p)(2)© that substantially level amortization must be required over the term of the loan, and (ii) the fact that under the loan agreement, loan payments are required on a monthly basis.

Employer believes that the fact that the loan agreements in place REQUIRE monthly payments satisfies item "(i)" above (because the literal reading of the Code simply requires that the loan CALL FOR substantially level amortization). However, employer worries about the permissibility of unilaterally requiring that employees make loan repayments on a schedule that differs from what is required under the loan agreement.

How should employer handle? (Any citations to authority for the approach you recommend would be appreciated.)

[JanetM]

Why not just reamortize the loans for new payroll schedule? Someone just starting to repay a 4 or 5 year loan will actually overpay if you stick to original schedule since they will be paying 2 extra payments each year. The interest will be lower if you reamortize - folks will see small decrease in payment - that should make the employer happy.

[Guest boecar]

Thanks for your thoughts, Janet.

Under what authority would employer unilaterally re-amortize plan loans that, by their terms, call for monthly payments?

[JanetM]

We are plan sponsor/employer. Promissory notes for all four K plans list, loan amout, interest rate, total interest and total P&I, # payments, pay off date. and pay frequency. Note has one sentence to say if any of this information changes the loan could be reamortized.

Nothing to it. Nothing unilateral about it.

What would your employer do if this happened - cause this happened today in my office. Person was out on medical leave and suspended loan payments. Now they are back and must make 14 months of payments in 8 months to avoid exceeding the 5 year limit. We simply reamortized the loan.

If they change from monthly to biweekly - there will be 26 payments made on loan instead of 24. The acceleration of the payments will decrease the total interest paid over life of loan. The truth in lending disclosure you have in promissory note is now not TRUTH. If this plan requires an audit - this won't fly by an auditor.

Could be couple things - flash back to my days as a TPA - the employer might just not want to pay you to do all that work and is trying to justify not spending the money.

You won't find a site saying if you make changes you must reamortize ..................