Revolving Line of Loan Cure Periods

[Guest lwallace]

True scenario: Mr. X has a 401k loan from his employer's plan, which being a tiny company does not do payroll deductions. So Mr. X has to make payments himself. Loan is for 5 years, with monthly payments.

Early June 2009 - 401k loans are reviewed by recordkeeper/trustee for any beyond 90 days delinquent. Find the last monhly payment from Mr X was December 2008. A letter is sent, telling X he has to make 3 months payments by June 30th, or it's taxable distribution time. He makes the 3 payments in time.

Early September 2009 - No other payments have been made by X. So now April. May, and June (not to mention July and August) are due. He will get another letter telling him to pay for 3 months by September 30th. He will make it once more, just in time.

This routine has been repeated every quarter since the loan was issued, and it's pretty likely to keep replaying over and over. My questions is : Even if technically Mr X is avoiding a deemed distribution, isn't the envelope getting pushed a little too far? Since his payments are being made quarterly rather than monthly, as specified in the note, could it be deemed due to violation of the terms? Is our shop too soft of heart?

[J Simmons]

The regs set the outer limit of what can constitute a default of the loan--no payment as of the end of the calendar quarter following the calendar quarter in which the scheduled loan payment came due. The loan documents may effectively define and set default to occur earlier. If so, then your shop is too soft of heart. You need to look at the specific loan documents to be sure.

[Guest lwallace]

The regs set the outer limit of what can constitute a default of the loan--no payment as of the end of the calendar quarter following the calendar quarter in which the scheduled loan payment came due. The loan documents may effectively define and set default to occur earlier. If so, then your shop is too soft of heart. You need to look at the specific loan documents to be sure.

The loan policy and plan document set no limitations on timing for defaults that are any stricter than the regs. That being the case, would anyone else have problems letting this lagging payment situation continue?

[Guest Sieve]

I assume, as per the amortization schedule, that there will be more interest due at the end of the 5-year period if payments of the monthly amount X 3 are being made quarterly. For this reason, and to eliminate the recurring scenario of not making any of the required monthly payments, why not re-amortize the remaining loan amount into quarterly payments (assuming you make the same type of schedule available to non-owners, as well)?