Missed Loan repayment

[Guest lbz123]

We have a debate going on about the proper handling of loans when an employee isn't paid in a given pay period (not a leave of absence) or is paid too little to allow a loan deduction. This typically happens during plant shutdowns when someone is taking the time unpaid, so they may be unpaid for the entire pay period, or be paid only for a day during the pay period. Our loan policy does allow for cure period.

Opinion 1 - the missed loan payment needs to be made up by the end of the cure period or the loan must be deemed. It doesn't matter if the employee makes a payment in the following pay period, the one missed payment causes a default.

Opinion 2 - When the employee is paid again, a loan payment is taken again, thus curing the loan default that occured from the missed payment. At end of loan repayment period, there is a balance remaining that participant must pay by end of cure period or loan is deemed.

Typically we try to make up the missed loan payment when the employee is paid again by doubling payments, however, we have multiple locations with decentralized payroll, multiple payroll systems involved, and multiple pay frequencies, so it is hard to enforce/monitor that this happens each time a loan payment is missed. So there has been discussion of whether it is truly necessary to try to catch these missed payments, and, since we have difficulty applying this consistently, would we be better off not trying to double up payments.

For leave of absences we reamortize, but our new 401k vendor refuses to reamortize for one or two missed payments when it doesn't involve a leave of absence.

[Belgarath]

You say you have a cure period. How long is your cure period? Since it can be as long as the end of the calendar quarter following the calendar quarter in which the missed payment occurred, then it seems like this would take care of most of your situations?

[Guest lbz123]

Belgarath - Our cure period is as you described, end of the quarter, following the quarter in which the default occurred.

So under Opinion 2 - the feeling is that the default was cured when the next payment was made, and that there will just be a balance remaining at the end of the loan period (due to the missed payment) that will need to be paid at that time.

However there is an internal argument that by the end of the cure period, the participant is still one loan payment "behind" their amortization schedule so that the missed payment needs to be made up at that time, not at the end of the loan.

[Guest Sieve]

Depends on what your note says, too, as to when a default occurs. Paying a missed payment before the end of the cure period prevents deeming the loan, as long as there are not other missed payments during the same quarter which are not repaid during the same cure period.

Seems like one missed payment ought not result in a default if that missed payment is repaid before the end of the cure period, as long as the same happens with the new resulting missed payments (since there was no repayment doubling up). This could go on for the life of the loan, perhaps, but you could not use the cure period after the repayment period otherwise expired if the loan is a 5-year loan--that means it wasn't repaid within the statutory 5-yr. period. You'd have to deem the final payment.

Nothing in the regs requires the loan to be current at the end of a cure period--there could be a new default resulting from the perpetually missed payment, with a new cure period.

[Guest lbz123]

Thank you both for your comments. I will go back and look at the promissory note to see what that wording says regarding defaults. I appreciate everyone's time and comments.