Loan

[Guest Hgreer]

I have a situation where are participant was on extended leave presumable for medical reason and now a whole year has passed with no loan payment. I have scoured the literature but can seem to find any details on what should be done? Should the loan be deemed a default once the year anniversary passes? Thanks for any input or direction!!

[QDROphile]

Treasury regulation section 1.72(p)-1, Q&A (9).

[Guest Hgreer]

It says "A–9: (a) Leave of absence. The level amortization requirement of section 72(p)(2)© does not apply for a period, not longer than one year" - so should I assume that after a year of leave of absence other than military service that if payment does not resume we go ahead and deem the loan defaulted? Wish it was a little more clear- thanks for the help.

[Guest BWNWE]

It says "A–9: (a) Leave of absence. The level amortization requirement of section 72(p)(2)© does not apply for a period, not longer than one year" - so should I assume that after a year of leave of absence other than military service that if payment does not resume we go ahead and deem the loan defaulted? Wish it was a little more clear- thanks for the help.

A plan also may suspend loan repayments during a leave of absence of up to one year. However, upon return, the participant must make up the missed payments either by increasing the amount of each monthly payment or by paying a lump sum at the end, so that the term of the loan does not exceed the original 5-year term.

(Reg. § 1.72(p)-1, Q&A-9(a))

It sounds to me as if the loan is in default. The IRS does offer the following guidance on loans in default:

Finally, for loans that are deemed in default, correction can be:

a lump sum payment equal to what should have been made to the plan, plus interest,

reamortization of the outstanding balance of the loan over the remaining payment schedule of the original term of the loan, or

a combination of either of the above methods.

Additionally, in certain situations involving defaulted loans (e.g., where the employer didn’t start payroll withholding for repayment of the loan), the employer may be required to pay a portion of the repayment made by the employee in order to correct the defaulted loan.

Somebody with expert knowledge should speak to this but I do believe that you would have the option, assuming that it has not been more than five years from the original date of the loan, to reamortize the loan over the remaining period up to the maximum period. I.E. if the loan repayment schedule was for three years and it has been two years and six months since the inception I think, THINK, that you could reamortize the loan over the six months remaining in the original term of the loan.

You also have the option, which is the safest way to ensure compliance, to inform the participant that he/she needs to repay the entire loan plus interest in a lump sum or the defaulted loan will be a deemed distribution, subject to applicable federal tax withholding.

[Guest Hgreer]

Thank you - most helpful!