Refinanced Loans

[sam2012]

These refinanced loans can get a bit confusing. I think I know the answers but seeking comment if you agree or disagree with any of my conclusions.

1. We have a participant with over 100K balance who had an outstanding loan of $12,000 due October 2017. The plan only allows one loan. In December 2015 they refinanced and withdrew $25,000 to bring the loan balance to $37,000 still due October 2017. Now, the participant has decided they cannot afford the loan payments. They did pay in a lump sum payment of $9,600. I have been asked if the October 2017 date can be extended out to December 2020 (5 years from the loan refinancing) but my understanding is that it cannot as 10/17 is the latest permissible date for the loan. Does anyone disagree that the maturity date has to remain 10/17?

2. The ironic thing is if the participant had just taken around $10,000 or less when they refinanced they could have had a brand new 5 years and then came back and taken more a week, few weeks, months later as long as maturity date was the same. Am I missing anything?

3. When a loan is refinanced is only the actual outstanding loan counted towards the $50,000 look back? For example, if a participant has a $12,000 loan and refinances and withdraws another $25,000. Then six months later, the participant asks for another $5,000. Was the highest balance in the last 12 months just the actual outstanding balance of $37,000 or due to the refinancing considering both loan outstanding for a total of $49,000. (Replaced Loan $12,000 plus Replacement Loan of $37,000). I believe it is just the $37,000 but wanted to see if anyone had another opinion.

4. Does the entire new loan counted towards the $50,000 look back or just the additional amount being issued? For example, a plan allows two loans and the participant already has two (loan #1 $6,000 and loan #2 $15,000) and the highest outstanding loan balance in the last year was $30,000. The participant wants another $10,000. Since loan #2 has a later maturity they would like with that one but would the new loan balance of $25,000 exceed the $50,000 look back? They are only taking $10,000 more dollars but it appears that the entire new balance of the replacement loan must be taken in to account. If so then the participant could only take $10,000 if it was added on to loan #1. It could not be added on to loan #2. Correct?

Thanks!

[masteff]

Reg 1.72(p)-1 Q&A-20


Q-20: May a participant refinance an outstanding loan or have more than one loan outstanding from a plan?

A-20: (a) Refinancings and multiple loans--(1) General rule. A participant who has an outstanding loan that satisfies section 72(p)(2) and this section may refinance that loan or borrow additional amounts if, under the facts and circumstances, the loans collectively satisfy the amount limitations of section 72(p)(2)(A) and the prior loan and the additional loan each satisfy the requirements of section 72(p)(2)(B) and © and this section. For this purpose, a refinancing includes any situation in which one loan replaces another loan.

(2) Loans that repay a prior loan and have a later repayment date. For purposes of section 72(p)(2) and this section (including the amount limitations of section 72(p)(2)(A)), if a loan that satisfies section 72(p)(2) is replaced by a loan (a replacement loan) and the term of the replacement loan ends after the latest permissible term of the loan it replaces (the replaced loan), then the replacement loan and the replaced loan are both treated as outstanding on the date of the transaction. For purposes of the preceding sentence, the latest permissible term of the replaced loan is the latest date permitted under section 72(p)(2)© (i.e., five years from the original date of the replaced loan, assuming that the replaced loan does not qualify for the exception at section 72(p)(2)(B)(ii) for principal residence plan loans and that no additional period of suspension applied to the replaced loan under Q&A-9 (b) of this section). Thus, for example, if the term of the replacement loan ends after the latest permissible term of the replaced loan and the sum of the amount of the replacement loan plus the outstanding balance of all other loans on the date of the transaction, including the replaced loan, fails to satisfy the amount limitations of section 72(p)(2)(A), then the replacement loan results in a deemed distribution. This paragraph (a)(2) does not apply to a replacement loan if the terms of the replacement loan would satisfy section 72(p)(2) and this section determined as if the replacement loan consisted of two separate loans, the replaced loan (amortized in substantially level payments over a period ending not later than the last day of the latest permissible term of the replaced loan) and, to the extent the amount of the replacement loan exceeds the amount of the replaced loan, a new loan that is also amortized in substantially level payments over a period ending not later than the last day of the latest permissible term of the replacement loan.