Participant Loan Refinance

[Dougsbpc]

A 401(k) plan does not allow concurrent loans. However, it does allow participants to refinance loans. The plan also allows for extended amortization for loans used to purchase real estate.

A participant took a loan 7 years ago at a much higher rate than now. He has 23 years remaining. He wants to refinance the existing loan to the current lower rate and expects the new refinanced loan to have 23 remaining years.

I could be wrong, but I contend that the new refinanced loan repayment cannot exceed 5 years. This because the new refinanced loan is not for the purchase of a principal residence at this time.

I checked the plan document and looked in other places but could not find anything on point regarding this.

Has anyone run into this before? If so, do you agree the new loan cannot exceed 5 years?

[Belgarath]

I disagree. Please see the following excerpt from 1.72(p)-1, Q&A-20. the emphasis is mine.

Q–20: May a participant refinance an outstanding loan or have more than one loan outstanding from a plan?

A–20: (a) Refinancings and multiple loans —(1) General rule. A participant who has an outstanding loan that satisfies section 72(p)(2) and this section may refinance that loan or borrow additional amounts if, under the facts and circumstances, the loans collectively satisfy the amount limitations of section 72(p)(2)(A) and the prior loan and the additional loan each satisfy the requirements of section 72(p)(2)(B) and © and this section. For this purpose, a refinancing includes any situation in which one loan replaces another loan.

(2) Loans that repay a prior loan and have a later repayment date. For purposes of section 72(p)(2) and this section (including the amount limitations of section 72(p)(2)(A)), if a loan that satisfies section 72(p)(2) is replaced by a loan (a replacement loan) and the term of the replacement loan ends after the latest permissible term of the loan it replaces (the replaced loan), then the replacement loan and the replaced loan are both treated as outstanding on the date of the transaction. For purposes of the preceding sentence, the latest permissible term of the replaced loan is the latest date permitted under section 72(p)(2)© ( i.e., five years from the original date of the replaced loan, assuming that the replaced loan does not qualify for the exception at section 72(p)(2)(B)(ii) for principal residence plan loans and that no additional period of suspension applied to the replaced loan under Q&A–9 (b) of this section). Thus, for example, if the term of the replacement loan ends after the latest permissible term of the replaced loan and the sum of the amount of the replacement loan plus the outstanding balance of all other loans on the date of the transaction, including the replaced loan, fails to satisfy the amount limitations of section 72(p)(2)(A), then the replacement loan results in a deemed distribution. This paragraph (a)(2) does not apply to a replacement loan if the terms of the replacement loan would satisfy section 72(p)(2) and this section determined as if the replacement loan consisted of two separate loans, the replaced loan (amortized in substantially level payments over a period ending not later than the last day of the latest permissible term of the replaced loan) and, to the extent the amount of the replacement loan exceeds the amount of the replaced loan, a new loan that is also amortized in substantially level payments over a period ending not later than the last day of the latest permissible term of the replacement loan.

[masteff]

At first I was going to disagree w/ Belgrath based on Q&A-8, however closer reading of Q&A-20 makes me of the opinion that since loan #1 was already qualified for the principal residence loan exception then the replacement loan doesn't have to requalify for the exception. Q&A-8's "cannot qualify" implies to me a new qualification (eg, a non-residence loan into residence loan) as opposed to the continuation of existing qualification.