Loans and Summer Leaves

[austin3515]

Have a client where they lay people off over the summer. The people are generally brought back in September (work load follows the school year). Many have loans. Has anyone come up with a good way to address this problem (i.e., they systematically end up behind on their loans).

Doubling up payments when they get back is one that comes to mind, but that can be a tough sell for some employees. Reamortizing the loan every time they leave doesn't appear to be a great solution either seeing as how the recordkeepr chargers a new loan set up fee every time we do that. Anything?

[MoJo]

Have a client where they lay people off over the summer. The people are generally brought back in September (work load follows the school year). Many have loans. Has anyone come up with a good way to address this problem (i.e., they systematically end up behind on their loans).

Doubling up payments when they get back is one that comes to mind, but that can be a tough sell for some employees. Reamortizing the loan every time they leave doesn't appear to be a great solution either seeing as how the recordkeepr chargers a new loan set up fee every time we do that. Anything?

Eliminate loans going forward (my fav, but always a tough sell).... Have the plan sponsor accept loan payment checks during the summer from participants and forward them to the plan/trust. Deem them (if they get behind enough) and maybe participant's will think twice next time.

Sorry, but I show no mercy for loans/borrowers from plan assets.

[austin3515]

Of course I'm sure my client would be more than happy to collect checks from these people. But that could give them more leverage to double up when they get back (i.e., because you never sent your payments in, now we have to get you caught up).

[ETA Consulting LLC]

Of course I'm sure my client would be more than happy to collect checks from these people. But that could give them more leverage to double up when they get back (i.e., because you never sent your payments in, now we have to get you caught up).

I think we agree that whatever the approach, the onus is on the participants to ensure their loans remain current. I know in some districts, teachers are allowed to choose between getting paid over the 12 month period or 10 months during work. In either case, they do not appear to be excluded from loan repayment (as it doesn't appear to be a bonafide leave of absence granting an extention). Receiving your annual compensation during 10 months appears different than going on unpaid leave for up to one year, but that's an interpretational issue.

I'd send a right to cure by the end of the quarter after the quarter in which the first payment was missed and move on. If nothing else, that would reenforce the notion of it being the participants' issue, not yours or the employers

Good Luck!

[BG5150]

Be careful of the loan agreements if you want the people to send in their own checks. Many agreements say $x.yz will be deducted each paycheck, and make no mention of what happens if there is no check.

Would doubling up on payments be allowed? That would seem to run afoul of the level amortization rules.

If the participants are not sending in their own checks (timely), I think you have three choices: 1) get the loan caught up when they return, 2) reamortize to the end of the original loan or 3) reamortize to the end of 5 years after the loan was taken.

[austin3515]

Many agreements say $x.yz will be deducted each paycheck, and make no mention of what happens if there is no check.

I agree, I would amend to allow payment by check.

[BG5150]

And if the participants are not going to be making up payments themselves over the summer, would the loan even be valid if the Trustee knows that payments will be missed?

[Guest jims]

The validity of the loan will depend on the trustee following the rules of having payments up to date each quarter, otherwise they are in default and you have a deemed distribution. A deemed distrubution will be a taxable to the borrower, so that should motivate people to make payments when its not coming from payroll.