Participant Loan 1999

[Guest csdavis]

Participant has a mortage loan in plan with a 30 year amortization schedule that was written in 1999. IRS is questioning the 30 years. 72(p) gives example with 15 year mortage loan. However, the verbage does not specifically state a loan on a primary residence must be 15 years. Can anyone give me a specific code section, revenue procedure (etc.) were I can prove the 30 years was the maximum at the time it was written in 1999? Thanks for you help!

[Guest mjb]

I dont understand what you are trying to prove. 30 yr mortgages have been around since the depression. IRC 72p2B only states that the 5 yr max period for loans does not apply to a loan to purchase a principal residence. There is no statement of a 15 yr term nor does the IRS issue rulings on what is the max term. Some banks issue home mortgages for 40 or more yrs to allow homeowners to borrow greater amounts than they could pay back with a 30 yr term. You can go to a library and xerox the rates for 30 yr mortgages in the Wall Street Journal on any day in 1999 to demonstrate that this was a reasonable period. What you should ask the agent is the authority for questioning a 30 yr home loan which has been an acceptable term for 75 yrs.

[FormsRstillmylife]

Participant loans are subject to state loan regulation. That is how plans with more than 25 loans become subject to the Truth-in-Lending disclosure rules. States regulate the period for a loan that is not collateralized by the real estate. In Pennsylvania, the limit is 120 months. We are going to be implementing this, but we also have loans that were written under plan administrator loan policies that permitted 30 year loans.

The response I would give to the IRS is that its regulation did not create a limit, the state loan law creates the limit. This is not within the IRS's jurisdiction. I will research the applicable state laws Mr. Agent sir and see what they were in 1999 and now. Future loans will be granted in accordance with current state law. Past loans were granted on a nondiscriminatory basis. An error in interpretation of state law should not be permitted to work such a hardship on a qualified plan participant as to force the Plan to reamortize the loan in order to maintain its qualification. (Reamortization will probably be required, but this should not escalate to a taxable distribution to the participant in 1999.)

[Guest Pensions in Paradise]

October 2004 Annual Conference - IRS Questions and Answers

27. What is the longest period allowed for a principal residence loan? To NRD? 30 years? 50 years? Is there any legal limit?

A: The limit would be what is commercially reasonable.

How old is the participant in question?

[Guest mjb]

Forms: How can state laws regulate the terms of plan loans when state laws are preempted by ERISA? Truth in lending is a fed law that regulates loan disclosure which is why it is not preempted by ERISA. As noted by PP the length of a loan is determined by commerical lenders, not by the IRS.

[hr for me]

Well, back in 1999 and prior to that I was processing/administering 401k plans and loans for multiple clients through an HR consulting firm. It is my recollection that there was a max of 5 years for most loans. The only ones that could go beyond that were for residences and I remember there being a max of 15 years.

We helped companies write their 401k plans and that was a standard in our plans. Unfortunately I can't tell you if it was IRS/ERISA law of a max of 15 years or if it was just common practice. But 15 years is sticking out in my mind.

I too would question how old the participant was in 1999 and was 30 more years of working for the company reasonable?