Loan Default

[Guest elang]

Plan participant with a loan was termed 4/23. He stopped making loan pmts when termed & was re-hired 10/15. The way I understand it is the cure period would have ended 9/30. Is there the possibility that the participant can make up loan pmts & interest and continue with the loan at this point or is it too late? Thanks

[ETA Consulting LLC]

Plan participant with a loan was termed 4/23. He stopped making loan pmts when termed & was re-hired 10/15. The way I understand it is the cure period would have ended 9/30. Is there the possibility that the participant can make up loan pmts & interest and continue with the loan at this point or is it too late? Thanks

Yes, under VCP. This is provided that you did not exceed the 5 year repayment period. You know, I've seen this in several instances where the participant wanted to pay the loan current and resume payments when the loan actually had a significant amount of time left. I allowed the payment even though it was, technically, beyond the cure period. It goes to comfort. If challenged on audit, the IRS agent "may" deem it taxable or actually decide the violation isn't eggregious enough to challenge it (given their potential fixes under Rev. Proc. 2008-50).

This will, ultimately, be a judgement call on your part. In instances that I faced, I noticed that a "right to cure" was not communicated to the participant. Had it been communicated and the loans defaulted timely, it wouldn't be an issue. Also, keep in mind the Regs "Require" it to be solved by the end of the quarter following the quarter in which the first payment was missed (as you clearly stated). The plan's provisions may have been sooner (i.e. 60 days). The regs merely preclude the plan from going beyond that period.

Good Luck!

[Bill Presson]

Plan participant with a loan was termed 4/23. He stopped making loan pmts when termed & was re-hired 10/15. The way I understand it is the cure period would have ended 9/30. Is there the possibility that the participant can make up loan pmts & interest and continue with the loan at this point or is it too late? Thanks

Yes, under VCP. This is provided that you did not exceed the 5 year repayment period. You know, I've seen this in several instances where the participant wanted to pay the loan current and resume payments when the loan actually had a significant amount of time left. I allowed the payment even though it was, technically, beyond the cure period. It goes to comfort. If challenged on audit, the IRS agent "may" deem it taxable or actually decide the violation isn't eggregious enough to challenge it (given their potential fixes under Rev. Proc. 2008-50).

This will, ultimately, be a judgement call on your part. In instances that I faced, I noticed that a "right to cure" was not communicated to the participant. Had it been communicated and the loans defaulted timely, it wouldn't be an issue. Also, keep in mind the Regs "Require" it to be solved by the end of the quarter following the quarter in which the first payment was missed (as you clearly stated). The plan's provisions may have been sooner (i.e. 60 days). The regs merely preclude the plan from going beyond that period.

Good Luck!

I agree with this. Assuming it was within the same plan year, I would see what the Employer/Plan Administrator was willing to do.

If the date for deeming the loan was in a prior plan/calendar year, I would be less likely to recommend leniency to the Employer.

[ETA Consulting LLC]

If the date for deeming the loan was in a prior plan/calendar year, I would be less likely to recommend leniency to the Employer.

"Like" It does have the potential of becoming a house of cards when it moves into another year; one unanticipated mis-step can easily lead to additional issues.