Loan policy not followed

[John Feldt ERPA CPC QPA]

A plan's loan policy had a limit of 5 years for participant loans. The vendor issued a loan a couple weeks ago for a 15-year primary residence loan.

The plan sponsor does not want to adopt a new loan policy that allows for primary residence loans.

The loan is not in default, the end of the cure period hasn't passed. One payment just occurred. Has an actual error occurred that would necessitate VCP?

Could this be self-corrected by re-amortizing the loan now to not go outside 5 years or by having the participant pay off the loan now and borrow from outside the plan?

[RatherBeGolfing]

Rev Proc 2013-12 6.07©

Loan terms that do not satisfy § 72(p)(2)(B) or ©. For a failure of loan repayment terms to provide for a repayment schedule that complies with § 72(p)(2)(B) or ©, the failure may be corrected by a reamortization of the loan balance in accordance with § 72(p)(2)© over the remaining period that is the maximum period that complies with § 72(p)(2)(B) measured from the original date of the loan.

I know you can self correct loans from a plan that didn't allow for loans, but only if the loans were within the limits of 72(p). Since there is an exception under 72(p) for principal residence loans, I think you could do SCP if you wanted to amend the plan to make the 15 year loan allowable under the terms of the plan document. Following that same reasoning, I think you are stuck with VCP if you want to correct in a way other than expanding what loans are allowed under the plan...

[John Feldt ERPA CPC QPA]

The quote from EPCRS mentions violations under 72(p)(2)(B) and (C ).

But if the loan is merely outside the plan's written loan policy, has it actually violated 72(p)(2)(B) or (C )?

(B ) says the term can't exceed 5 years unless the loan is for a home.

(C ) requires substantially level amortization of such loan (with payments not less frequently than quarterly) over the term of the loan.

Suppose the loan gets entirely paid off now. Did the plan have an actual error? The loan is just over two weeks old.

[RatherBeGolfing]

That is at least an argument you could make. I would probably consider the same argument if it was my client...

What if loans weren't allowed at all, but the plan issues a loan amortized over 5 years. The Sponsor does not want to amend to allow loans. What is your correction? It is essentially the same question. You have a failure to follow the terms of the plan. The loan does not exceed the 5 years under 72(p)(2)(B).

Without a correction, it is a deemed distribution to the participant.

Simply repaying the loan isn't a correction of the failure since the failure occurred when the loan was issued.

The simple answer is amend under SCP to allow for loans.

I think what you are suggesting (at least in the OP) is that you can:

apply the VCP method of correcting a loan in violation of 72(p)using SCP because the loan did not actually violate 72(p), it violated the terms of the plan document.

Rev Proc 2013-12 6.02 allows for more than one way to correct a failure, as long as it is reasonable and appropriate under the facts and circumstances.