Loan Repayments - Sponsor changing payroll frequency

[WesleyT]

I have a plan sponsor (with many, many loans) changing the frequency of payroll from weekly to bi-weekly. I'm trying to determine if I should be reamortizing all of these loans. From a technical perspective, I lean towards yes. The loan note and amortization schedule no longer apply. Also, what would an auditor say if looking at the loans? I'm just having trouble doing all of this work for a probable repayment change of pennies each payroll period.

As a secondary idea, what do you think of doing a generic plan sponsor initiated amendment to the note and amortization schedule? It would basically say that the payment schedule changed and that payments would be twice the payment listed on the original note (ignoring the minute payment difference). Each participant with a loan could sign the form. That way both parties agree to the change of terms without having to customize a form for each loan.

Anyone have any experience with this issue?

Thanks!

[WDIK]

http://benefitslink.com/boards/index.php?showtopic=6824

[rcline46]

What will your software do when it has 'missed' payments?

The interest should be (pennies) higher on a bi-weekly schedule - will the software cause the loan to be extended for a tiny final payment?

I agree the changes will be minute. We have had clients change payroll frequency. We billed the client for our time to prepare new amortization schedules so the software would process correctly.

[WesleyT]

WDIK - Thanks. I did see that post, but I didn't get a whole lot out of it...the two posters ended up using different routes. And I don't place a lot of weight on the "level amortization requirements" argument. I didn't see that as an issue.

rcline - We don't track the actual payments through our pension software. We have our amortization schedules listed with the financial institution, who then applies them when payments come in. So, we actually end up importing the annual interest / payments at the end of the year. So, our software will work fine in either case.

[Guest Sieve]

The cite referenced by WDIK discusses a change of payroll form bi-weekly (26/yr) to semi-monthly (24/year), so amortization would certainly be necessary to levelly amortize over the term of the loan. Here, the change is from 52/yr to 26/yr, so a doubling of the amount due is probably insignificant.

Still, my strong recommendation would be to reamortize--otherwise, the repayment of the loan will not be pursuant to its terms (& the interest rate will not be correct). But, if choose not to reamortize, and only want to revise the payment schedule with a form amending the terms of the loan, then it should be signed by the participant and the Trustee.

[masteff]

Just to put some numbers to the question....

Assume you have the maximum loan of $50K at 5% for 5-years.

The weekly amort sched payment would be $217.44

The bi-weekly amort sched payment would be $435.06

Suppose you paid the loan on a bi-weekly schedule but using the 2 times the weekly amort sched amount... the difference in interest over 5 years would only be $27.13

$27.13 is extremely immaterial.

And that's on the max loan, most of yours will be much less.

[pmacduff]

FWIW,

We have the issues when the client changes to/from semi-monthly (24 pays) to/from weekly (52) or bi-weekly (26). As many have mentioned it isn't really a significant amount over the course of the loan, but you can't accurately use the original amortization in those instances and need to be sure that the loan is satisfied on or before the original date to stay within the 5 year limit.

[BG5150]

Who is going to keep track of all those "little balances" at the end that will crop up?

And how are you going to zero those out? It is money "owed" to the trust and the participant's account, so you just can't forgive it. The other this is to track it and have the company's payroll change the loan payment for 219.21 to 0.48 for one payroll and hope they remember to remove it the next time.

[masteff]

We have our amortization schedules listed with the financial institution, who then applies them when payments come in.

As for this original poster's situation, you don't track them at the end... you spend a small amount of time at switch-over to make sure the amort schedules are updated properly so the fin inst applies the right amount of interest. You just have to figure out ahead of time how you calculate/adjust the interest so principal comes out to zero after the last scheduled payment is made.

Now if you're using a system that calculates the accrued interest itself when a payment is applied, then you have a messier situation.

Another thought... it'd be hard to reamortize the payment given that the participant signed a loan doc (unless you have some useful language in the loan doc). If you can't reamortize, then you'd only have option of doubling the weekly payment and applying interest as if the payments had been made weekly as per the loan doc.