Change in payroll period - affect on loans

[cpc0506]

We have a client who is changing their payroll period from weekly to bi-monthly.

The plan has loans. I would think that the loan has to be re-amortized to allow for bi-montly instead of weekly payments. What are our obligations? Does this require new paperwork for the particpants? A new promissory note?

[BG5150]

Your obligations? What is your role to the plan/sponsor?

I would suggest getting new loan agreements. Otherwise, unless the record keeping system is really robust, you will have problems down the line.

[cpc0506]

Your obligations? What is your role to the plan/sponsor?

I would suggest getting new loan agreements. Otherwise, unless the record keeping system is really robust, you will have problems down the line.

Sorry, we are the TPA and funds are with Strategic Alliance (John Hancock) and have been contacted by the plan sponsor on what needs to be done to make sure the loans are repaid timely.

[austin3515]

With JH, they don't care that the payments coming in have changed. So you should reamortize the loans, and it won't be too big of a deal. If you don't then a 5 year loan will be repaid over 260 sem-monthly pay-periods which of course is too long.

Perhaps you could get away with simply doubling the loan payments for those people not in danger of exceeding the 5 years (i.e., 2 weeks ~=1 semi-monthly pay-period).

I think reasonableness has a place in loan admin.

[masteff]

1) Roughly speaking, if you didn't reamortize and simply took two weekly payments per semi-monthly paycheck:

Weekly payments = 52 payments per year

12 months / semi-monthly * 2 weekly payments = 48 payments per year

This leaves you 4 payments short per year. Since a quarter is 13 weeks, it would take about 3 years before any payment is more than an entire quarter behind.

So you wouldn't violate the grace period on a loan with a remaining term of 3 years or less.

2) What does your loan docs say? At a former job, we had employees on different pay cycles so our loan policy said we could reamortize if they switched cycles. Also, does it say they agree to $X per pay check or $X per week? If it's "per week", then I'd declare 2.167 weeks per semi-monthly (52/24) and be done. Of course then you have to figure how JH will count the payments and calc the interest; might have to reset JH to semi-monthly just so they apply the payments correctly.