Principal only formula for releasing shares from a suspense account

[Guest Deborah Grace]

I have encountered a practitioner who is interpreting the special rule under Reg.54.4975-7(B)(8)(ii) as being available only in situations where interest and principal are paid only once a year. The practictioner is pointing to the requirement that "...the loan must provide for annual payments of principal and interest at a cumulative rate that is not less rapid at any time than level annual payments of such amounts for 10 years.

Any ESOP loan I have been involved with had monthly payments, but I do not know that any of them uses this special rule for releasing of shares. Any authority for using principal only even if there are quarterly interest payments and annual principal payments?

[Guest Larry Goldberg]

In order to qualify to use the "principal-only" release method of Treasury Regulation Section 54.4975-7(B)(8)(ii), the Regulation requires the ESOP loan to be repaid within 10 years, and to meet a minimum amortization schedule. The requirement for level annual payments is not intended to preclude more frequent payments; the regulation is simply requiring annual testing of the ESOP loan payments to determine if the minimum amortization schedule is met. The regulation looks to cumulative payments on the ESOP loan to ensure the ESOP loan would not fall behind the 10 year level amortization schedule during any year.

Note that the IRS considered and approved the use of monthly loan payments in PLR 8704067, without regard to which release method is used under the ESOP loan.

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[Guest Deborah Grace]

Larry, thanks for the response. I found LTR 8925096 which mentioned as its factual background that montly payments were made under a principal only release formula. I assumed that if the IRS issued a ruling on these facts, it did not have a problem with monthly payments. It is great to know that there is more than one ruling on the issue.