How do you handle past due loan payments due to medical leave?

[pbarrett]

A client phoned and stated they have an excellent employee with a 401(k) participant loan who was in a serious car accident and will not be back to work for 4 months. The payroll will run out in 2 weeks and the employee is flat broke (cannot afford to send personal checks in to make the loan payments). Is there any way to avoid having the loan go into default and reporting it on a 1099R?

Any ideas out there?

[Kirk Maldonado]

The plan can suspend loan payments for up to a year (without causing a taxable default) while the individual is on a leave of absence, if the plan so provides.

[LCARUSI]

Kirk -

Must the loan be reamortized to reflect the gap in the payments?

[Kirk Maldonado]

All of the loan must be repaid by the original end of the loan period. Reamortizing the outstanding balance when the individual returns to work is the easiest way. Remember that the leave of absence cannot extend beyond the original end of the loan period.

[MWeddell]

The loan doesn't have to be reamortized under IRS regulations, but unless it was to purchase a home, one way or the other the 5-year deadline still applies even though payments were missed.

It's an open question whether ERISA would require the plan's fiduciaries to have the missed loan payments made up immediately or have the loan reamortized rather than just say everything's fine as long as all payments are made by the end of the 5-year deadline. Logically, it seems like there'd be an issue, but I suspect there's little DOL enforcement demanding that fiduciaries be more strict than what the IRS regulations require.