Military Leave & Loans

[Guest EdwardF]

A Participant with an outstanding loan is being called up to reserve duty for the next 9-12 months. The plan permits a grace period for non-payments to not extend beyond the last day of the calendar quarter following the calendar quarter in which the required payment was due. It is likely that the participant will not make payments by the end of the grace period.

Since the participant is on a qualified military leave, must the outstanding balance be considered in default following the end of the grace period or can payments be suspended.

[Guest sacobb]

I believe that you can suspend the loan payments. See IRC 414(u)(4)

[Erik Read]

If you do postpone the payments - do you not still have to have the same amortized period of time for payoff?

In other words - lets say we postpone payment and the participant does not return to his/her duties until 9 months have passed, are you not required to re-amortize the remaining loan/interest accrued at the point of return so the principle pay back period does not exceed the originals terms of the note (3 to 5 years)?

[MWeddell]

Code Section 414(u)(4) merely says an employer may suspend loan payments, but you'd still need to have the document amended in your case, it sounds like.

Addressing ERead's question, unless the loan was made to purchase the participant's primary residence, it must be repaid within 5 years or else the amount outstanding at the end of the 5-year period is treated as a taxable distribution. This 5-year period is not extended by the military leave. There's a cross-reference to 72(p) in Code Section 414(u) that confirms this longstanding IRS position.

[Kirk Maldonado]

You can suspend loan payments for up to a year with respect to a participant who is on any leave of absence. However, that cannot extend that term of the loan

[Guest EdwardF]

The current version of the plan document is silent regarding suspending loan repayments while on leave of absence. Is it necessary to amend the document?

Thanks for the feedback.

[Wessex]

Most of the plans on which I have worked do not address this type of issue in the plan document, but rather in the loan procedures. Because the suspension is permissive rather than mandatory, if neither the document nor the loan procedures expressly provide for it, it seems to me that an amendment would be required.