Late Loan Repayments and "Late" Release

[Guest KBurket]

What tie-in is required between contributions to a leveraged ESOP and loan repayments on the ESOP loan? Here's a situation:

A company maintains a leveraged ESOP. The plan's loan agreement allows for a late repayment, up to 60 days after the due date. If paid late, company is responsible for paying 1% penalty. If the company pays, for example, the loan payment due 12/31/1999 on, say, 2/15/2000, can the company call that contribution a 2000 contribution (since they will deduct it in 2000) and not release shares to participants until 2000, instead of as of 12/31/1999? Would the answer be determined solely by what the plan document specifies as the allocation date?

[RLL]

Contributions made to an ESOP after the close of a taxable year may be treated as having been made on the last day of that year if so designated and if paid by the due date (including extensions) for filing the company's federal tax return.

Assuming that the company has a 12/31 taxable year-end and that plan year also ends on 12/31, a contribution made (and used for loan payments) on 2/15/2000 can be treated as a contribution for either 1999 or 2000, as elected by the company. If the company designates the contribution as being for 2000, the appropriate allocation date would be 12/31/2000....unless for some reason the plan document provides for different treatment.

You should also review the terms of the loan agreement to determine whether some other treatment of a late loan payment is called for and/or appropriate in these circumstances.

[Guest KBurket]

Thanks for the reply. You mentioned that the company could elect to treat the contribution as either a 1999 or 2000 allocation. Do you have a specific citation for making this election - code section or regs?

[RLL]

Check out IRC Sec. 404(a)(9)(A) and Rev. Rul. 76-28.