Loan headache

[Eve Sav]

Participant loans give me a headache.  We have a plan with a few (3 or less) missed payments on loans that are otherwise in compliance with IRC 72(p). It is a construction company, and the Plan sponsor did not start up payroll deduction payments on time, or there was a short lay-off at the time that payments were to commence.  We are well inside of the cure period. 

We would like to reamortize the loans (rather than doubling up payments to get them current, or demanding a lump sum).

Is this really a loan refinance (meaning the loan program must permit refinancing)? Or is it just a reamortization (keeping the terms otherwise the same)?  And is something that is eligible for SCP, or does it require VCP?  I have been under the impression these types of loan errors could be self-corrected (within the cure period) . 

[Bird]

If future payments will be more-or-less on schedule, nothing needs to be done.  As long as all payments are within the cure period, just let it happen and don't make extra work for yourself.

[MoJo]

First, "loan" and "headache" are redundant.  No need to use them together.

Second, I agree with Bird, let it ride - except be cautious as these participants will be habitually a few payments behind and have effectively already "consumed" a portion of their cure period that may make the next incident "fatal" to the loan.

Third, to answer your original question, we believe it is a refi and needs to be consistent with the plan documents.

[CuseFan]

you'll need to catch them up at some point because once you hit the five-year mark the remaining balance is a violation/PT, right?

[Bird]

Not in my opinion.  I'd have to review prior posts on this to see if I ever agreed that this is at least theoretically correct, but I've always felt the cure period effectively extends the 5 years. 

[RatherBeGolfing]

19 minutes ago, Bird said:

Not in my opinion.  I'd have to review prior posts on this to see if I ever agreed that this is at least theoretically correct, but I've always felt the cure period effectively extends the 5 years. 

I agree with Bird.  Payments made within the cure period are essentially considered paid when due. I have heard the IRS argue both in favor and against this view in informal settings like Q&As and similar forums, but I think it is a reasonable position to take.

[Bird]

I found the thread that I was thinking of; read it here  if you are interested.  I guess I would/could rephrase things to say that the supposed "rule" that a loan must default if any amount is outstanding after 5 years comes from the TEFRA Blue Book, from something like 37 years ago.  As far as I know, there are no current regs that require a loan to default at that point - only rules that it can't be amortized over more than 5 years.  There is a difference.  I/we have better things to do than default a loan that has a $32.73 payment remaining at the five year point.