Loan payments after leave of absence

[Craig Garner]

1.72(p)-1, Q&A #9 outlines the requirements to avoid a deemed distribution when a participant returns from a non-military leave of absence. There are two options (#1) re-amortize the loan (possibly with higher payments, but never with lower payments) in order to payoff the loan before the 5-year term, or (#2) re-start repayment at the old payment amount AND a "balloon-payment" (my terminology) of the full balance on or before the end of the 5-year term.

My question is on option #2. What if the Pan Administrator allows option #2, and the participant gets to the end of the 5-year term and cannot make the final balloon payment? Obviously, a deemed distribution has occurred. But, WHEN did it occur and WHAT is the taxable amount?

My reading is that option #2 requires TWO things to occur to avoid a deemed distribution: re-start payments and make a balloon payment. Without both, I think the default date and amount goes all the way back to the "cure period", last day of the quarter following the quarter in which the first payment was missed. (The other possibility would be the value of the loan at the end of the 5-year term, because we were attempting to comply with Q&A #9, meaning basically that the balloon payment itself becomes the default amount). Of course, if the default goes back to the end of the cure period, we have a big mess on our hands and EPCRS kicks in. I guess I'm not sure how much good-faith can be used to assume that a participant will actually make a balloon payment?

[david rigby]

Q&A 10?