Payroll shifts from bi-weekly to monthly for person w/ loan

[BG5150]

I have someone with a loan whose pay schedule is going from bi-weekly to monthly. Does she have to fill out a new agreement? Or is just furnishing a new amortization schedule good enough?

[J Simmons]

My 2 cents? Just a new amortization schedule will do. On bi-weekly, some months you have 3 paydays rather than just 2 (the difference between bi-weekly and semi-monthly). If you wanted to strictly adhere to the terms of the existing documents, I think you would take the equivalent of 2 bi-weekly payments for some months, 3 for the other months--depending on how many paydays there would have been had the employer stayed with bi-weekly paydays.

[Guest Sieve]

I would strongly recommend a new promissory note, or an addendum to the note, if payroll deductions are being used as the source of the repayments.

[Kevin C]

Take a look at PLR 9729042.

Sal's book also says it should be a reasonable interpretation of of 72(p) that if all you are changing is the frequency of the payment date due to a change in the payroll period, that "new loan" treatment would not be necessary.

If you do a new promissory note, that looks like renegotiation of the loan to me.

[Guest Sieve]

But what if the promissory note has--as most do--a payment schedule as part of its terms (& not just an attached schedule)? As the Trustee, I would want a promissory note that indicates the proper payment schedule as an agreed-upon revision to the original note. Does Sal address that issue?

What's the difference, anyway, even if it is a renegotiation, as long as the remaining term of the original loan is being used? Why is that seen as a problem? Is it because a renegotiation would require all new documents, which is a pain? Frankly, if you can argue that it's not a renegotiation to change the loan repayment schedule for a valid business reason, then it's certainly not a stretch to also say that it's not a renegotiation to revise the promissory note to accomodate the revised repayment schedule.

[Kevin C]

The issue is whether or not the renegotiation is treated as a new loan. If it is, then you must reestablish the reasonableness of the interest rate and that the new loan does not cause the participant to violate any loan limits. If interest rates are up since the loan was taken and account balances are down, things could get interesting if you have to treat the changes as a new loan.

I was referring to item 1.c. on page 7.241 of the 2006 version of Sal's book.

[masteff]

What do the plan's loan rules say? We had two payroll cycles and also allowed terms to continue payments, so we had language in our rules that explicitly allowed changing payments based on these factors. E.g., terms were automatically reamortized to pay monthly.

If you have multiple pay cycles, your rules should provide for automatic reamortization. The loan note should always be made subject to plan's text and rules.

[Guest Sieve]

I don't have Tripodi handy (in another location), but if changing the repayment schedule is not a renegotiation, then why would revising the promissory note to comport with the new payment schedule necessarily be a renegotiation? Same argument (whatever it is) ought to apply in both cases. If you change the repayment schedule (due to changes in payroll), then how can you have a repayment schedule which is different from the one in the promissiory note and still have a valid promissory note? It would seem that the promissory note will remain enforceable based on the terms on its face, and any other repyament scehdule based on a revised amortization schedule would be unenforceable.

[R. Butler]

I agree with Sieve that some sort of agreement paperwork reflecting new repayment schedule should be signed. Anytime withholding money from a paycheck is involved I'd be more comfortable if it was in writing.

I also agree with Sieve that putting writing doesn't change the nature of the transaction. Changing the amortization schedule is either a refinance or it is not. Setting forth what you are doing in wirting does not change that answer.

I'm curious does PLR9729042 really address the new paperwork issue or does it merely set forth the IRS position that modifying the repayment frequency is not a refinance?