Missed Loan Payments

[katie58]

We have a client that for some unknown reason, stopped taking loan payments from paychecks for several participants.

The client wants to avoid defaulting the loans.

We understand the options would be to reamotize the loans if they are within the 5 year time period. However, one of the partiicpant's loans is outside the 5 year time period, so we believe it has to be defaulted???

In one of the IRS publications it indicated that if the error is due to employer error , the employer may be required to repay the interest on the unpaid amount. Does anyone know if this is required? I am concerned as it says "may" have to repay. It does not say it is "required".

[austin3515]

You've omitted a crucial detail - how long has it been since the participants last made a loan payment?

[katie58]

Six of them are 8 payments behind. one is 23 payments behind.

Thanks!

[austin3515]

8 quarterly payments?

[katie58]

8 missed payments - they pay biweekly.

[austin3515]

Does it end up being passed the last day of the quarter following the quarter in which the last payment was made? (assuming that is the Plan's grace period).

The one that is outside the 5 year time period is definitely defaulted, there are no options to correct that under EPCRS. I would suggest making the participant whole through a bonus.

[katie58]

Yes - they are past their cure periods.

Thanks again!

[Guest A_Dude]

Other issue will be maintaing a defaulted loan. At least the loans are done on payroll, so getting a new one is allowable. But, does the plan allow more than one loan?

8 Biweekly payments suggest they are likely beyond the "cure" period. Hopefully employer could immediately kick-in payments all the missed payment and interest, but check ECPRS if that is even alloweed... Otherwise default the loans, and the employer should at least pay the tax and early distro penalty. Do the employese get any of the blame? They should of noticed the bigger paycheck missing the loan payment and notified the employer. Check the loan policy to see what it says on this issue.

This happened in plan we had with one employee, but they were within the cure period. Our loan policy allowed the employer to blame the employee for not catching it and notifyiing them. . It sys the participant was soley responsible for repaying the loan basically under all circumstances.In our case 2 months were missed and we reamortized the loan.

[austin3515]

Employees have no responsibility whatsoever. ECPRS is definitely an option. You can either reamortize the loan over remaining 5 year period, or make a lump-sum payment to catch-up on the missed payments, or a combination of the two. I have see employers provide interest free loans and the like to make the participant whole. So for example, the lump-sum payment could be "loaned to the employee" from the employer. That way, their loan deductions for the participant loan would not be changed and would be repaid on-time. Then the employee loan could have it's own terms. Perhaps they just provide the employee with a bonus to fund the missed loan payments, grossed up for withholdings, etc. and send that in.

Regardless of which strategy is selected and how you choose to make the employees whole (the latter of which is not a factor with EPCRS), you would need to submit to the IRS under VCP to "undo" the default.

[austin3515]

See EPCRS Section 6.07. (EPCRS is in Revenue Procedure 2013-12).

[BG5150]

Side note: the EPCRS fix can only be done under VCP. SCP is not available.

[katie58]

Thank you all very much!!!