latest possible loan repayment start date

[justanotheradmin]

What is the latest date repayments can start?

I thought there was something that required payments at least quarterly (due to the cure period rules). But I don't see anything that says when the first payment actually has to start by.

I don't see anything in IRC §72(p) or Treas. Reg. §1.72(p) that actually address this.

Plan document (VS) language mirrors the regs - Cure period is ends at the end of the calendar quarter in which the installment payment was due, after which the loan is in default.

The loan policy/plan document do not provide any restrictions on how far out loan repayments can begin.

If there is no installment payment due that quarter, then the cure period doesn't start?

Example:

Loan taken 2/15/2014

First payment due (according to level amortization schedule) 6/15/2014

According to the default/cure period rules, a plain reading would seem that the loan is in default as of 9/30/2014, not 6/30/2014 as I would have thought.

Could the participant have put off the first payment even longer? As long as payments are level, and the loan is repaid in five years of the loan start date, I don't see any reason why the first payment can't be really far out. In the example, could the first scheduled payment have been 9/15/14? with quarterly level payments thereafter? Then if the first payment was missed, the loan would be default as of 12/31/2014?

I feel like there is guidance I must be missing, that this is a loophole someone else figured out and the IRS would have address it either formally or informally.

Can anyone clarify?

[Bird]

First payment due (according to level amortization schedule) 6/15/2014

So if that payment is not made by 9/30, the end of the following calendar quarter, it defaults. Since loans must be amortized (i.e. level payments) on at least a quarterly basis, I don't know how you could start any later. Amortized quarterly over 5 years means level, quarterly payments. How could you start on 9/15 or whenever and pay off the loan within 5 years with level quarterly payments?

(Actually, re-reading it, the loan was made on 2/15. I'm not sure how you have the first payment on 6/15 and not 5/15.)

[justanotheradmin]

I understand the work level to mean equal.

I don't see anything in the reg or IRC that requires the first payment to be within a certain time frame. What am I missing?

Why would the first payment have to be 5/15? Is there something that says it has to be made within 3 months? They are not the same calendar (or plan) quarter.

Starting the first payment on say 9/15 instead of 6/15 (or 5/15) would just result in higher, level (equal) payments.

Bird, I understand your comment about the 5/15 start, but I just don't see support for it it in the IRC, regs, or other guidance. Maybe there is something more informal that clarified?

[Bird]

The regs say loans must have level payments, at least quarterly. "At least quarterly" to me means, well, every three months, and I don't see how that could be interpreted so the first one isn't within 3 months of the effective date.

[masteff]

1) I agree with Bird. If you want to pursue a more aggressive position, that's your decision to make. At the end of the day, you'll be one who has to defend it to the IRS.

2) I found an older thread w/ a reference to the TEFRA "Blue Book". I finally tracked that document down. https://www.jct.gov/publications.html?func=startdown&id=2381 My take away from it (see page 296) is if the first periodic payment is made w/in 2 months of when the loan is made, then the 5 year amortization rule will commence from when the first payment is due. Otherwise, the 5 years starts from the loan date and payment schedule must provide the last payment is made by that anniversary date, otherwise you fail the requirement and the loan is a distribution.

[Kevin C]

This Q&A list is in the news section today.

http://www.americanbar.org/content/dam/aba/events/employee_benefits/2014_irs_qa.authcheckdam.pdf

Q 2 asks if the 5 year period can start with the date the first payment is due and references the TEFRA Blue Book entry cited above. The IRS response is no, the start date for the 5 year period can not be later than the the date the loan is funded or the date the proceeds are paid to the participant.

[masteff]

That's interesting and slightly disturbing. The IRS seems to be taking a "letter of the law" approach on a number of things lately what with this and the Bobrow tax court case on IRA rollovers. I wonder if they're moving to ignore all legislative intent or just when it's moderately old (TEFRA was 1982).

[Bird]

I think trying to read the tea leaves of a 32 year old Blue Book written by some obscure staffer is a little much. Buried in that same paragraph of the blue book is something that says if any amount of a loan is outstanding at the end of the 5 year period, it is treated as distributed. I've always wondered why some people said that (I think it is...well, dumb) but at least now I know there was some kind of basis for it. I think we have more than enough guidance since then to have this non-legislative commentary be effectively superseded.

FWIW, I also found the part of the proposed response in the ABA Q&A to be, I don't know, amusing. What, exactly, is so difficult about setting up an amortization schedule that completes payments within 5 years of the issue date? Somebody was trying to bluff the IRS and they didn't buy it.

Proposed Response: Yes. It is virtually impossible to make payments over the required five-year period
if the period commences on the date the participant receives the loan funds. We agree with the statement
in the “Blue Book” for TEFRA that says: “If there are required periodic payments, the first of which is
due to be made within two months of the date the loan is made, then [the] five-year repayment period will
be measured by the due date of the first payment.”

[masteff]

So at what point does something like a Blue Book become unreliable? Or do you contend it was never entirely reliable? I agree w/ your point that it's 32 years old and a fair amount of guidance has been issued in the interim.

What is your observation on record keeping software and the extent to which various vendors have programmed their software to accommodate the process of capping the number of payments on a 5-year loan to the extent the delay between loan date and first payment pushes the payment schedule past the 5-year anniversary date?

[Bird]

So at what point does something like a Blue Book become unreliable? Or do you contend it was never entirely reliable? I agree w/ your point that it's 32 years old and a fair amount of guidance has been issued in the interim.

I would rely on it if it supports my position, otherwise say that it's not really the law. Seriously, if it clarifies something that is completely muddled, then I think it is helpful. But I do think, in this case, that guidance since then has been clear enough.

What is your observation on record keeping software and the extent to which various vendors have programmed their software to accommodate the process of capping the number of payments on a 5-year loan to the extent the delay between loan date and first payment pushes the payment schedule past the 5-year anniversary date?

I think if the original schedule calls for a payment more than 5 years after the issue date, that it's problematic.

[BG5150]

Has anyone seen this picked up on in an audit?