Loans - Does the Cure Period "Roll"?

[Übernerd]

Can a participant keep "restarting" the cure period without ever bringing the loan current? For example, assume a plan provides for the maximum cure period. If a participant is behind on her loan, but is making sporadic payments (let's say 1/2 as often as required), when does the deemed distribution occur?

A. The end of the calendar quarter following the calendar quarter in which she first got behind, or

B. Not until she is so far behind that any payment she makes would be applied to a missed installment payment that was due before the beginning of the current cure period (e.g., such that a payment made after 6/30 would not be applied to a payment due after 1/1.)

Client has a pile of loans that were set up to be repaid at 1/2 the rate they should have been.

All comments appreciated.

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[Bird]

I'm not sure I follow your options but it is when any missed payment is beyond the cure period. Chronically late payments that never go beyond the cure period don't trigger a default.

[Übernerd]

I'm not sure I follow your options but it is when any missed payment is beyond the cure period. Chronically late payments that never go beyond the cure period don't trigger a default.

Let me put it another way. Assume Participants A, B, and C each take a loan on 12/1/2012, with the first payment due on 1/1.

Participant A misses the first monthly payment (1/1) on his loan but makes each payment thereafter. Does he have a deemed distribution at the end of the Plan's cure period (6/30)?

Participant B misses his first 5 payments, but makes his first payment on 6/1 and on the first of each month thereafter. Does he have a deemed distribution on 6/30?

Participant C makes every other payment on her loan: 2/1, 4/1, 6/1, etc. When does she have a deemed distribution? On 6/30, because she never brought the loan current? Or on 3/31/2013, when her payments can no longer be "related back" (i.e., be applied) to a missed payment that is within the current cure period?

[Belgarath]

Bird stated it perfectly.

Re your examples - Participant A - no, there isn't a deemed distribution. Participant B, yes, there is a deemed distribution. If I understand your Participant C scenario correctly, then you would have a deemed distribution on October 1. At that point, there should have been a minimum of 6 payments by September 31 (January through June payments, with the maximum cure period extending to the end of the calendar quarter following the calendar quarter of the late payments) but instead only 4 were made by September 31. So the February, April, and June payments can be counted for the 3 first quarter payments that should have been made - no deemed distribution on any of the first quarter payments. In the second quarter, however, only the August payment can be counted toward the April-June payments, so you are two short, and these weren't made up my any other payments by the end of the third quarter.

[Übernerd]

Bird stated it perfectly.

Re your examples - Participant A - no, there isn't a deemed distribution. Participant B, yes, there is a deemed distribution. If I understand your Participant C scenario correctly, then you would have a deemed distribution on October 1. At that point, there should have been a minimum of 6 payments by September 31 (January through June payments, with the maximum cure period extending to the end of the calendar quarter following the calendar quarter of the late payments) but instead only 4 were made by September 31. So the February, April, and June payments can be counted for the 3 first quarter payments that should have been made - no deemed distribution on any of the first quarter payments. In the second quarter, however, only the August payment can be counted toward the April-June payments, so you are two short, and these weren't made up my any other payments by the end of the third quarter.

Thanks, that's helpful.

[Bird]

A - no, the payment made in Feb is for Jan, etc, and none will ever go beyond the cure period.

B - 1 (Jan),2,3,4,5 are not made on time, then Jan is made in June, Feb/Jul, Mar/Aug...(assuming the max cure period), Jan is OK b/c it is made before Jun 30, but Feb is not since it is made after Jun 30. Default for the Feb payment occurs on Jun 30.

C- Jan pd Feb, Feb pd Apr, Mar pd Jun...all paid within the cure period. Apr (2nd Q) pd Aug (3rd Q), still ok, May (2nd Q) pd Oct (4th Q), there's your default, on Sep 30. I had to work it out but that agrees with Belgarath.