Incorrect Loan Payments

[bevfair]

Plan allows for 1 loan at a time.  Participant has a loan, which he took out in 2014 with a weekly payment of $31.38.  In August 2017, the Participant contacts the Investment Company, pays off the loan and requests a new loan.  New payment amount is $140.53.  The TPA approves the loan and it is then approved by the Plan Sponsor.  The entire process is done electronically.  Participant is not married so there is no spousal consent and thus no physical paperwork is generated for the request until the loan is approved and the IC sends a confirmation report to the participant which contains the terms of the loan.  This is a standard procedure.  TPA and IC notify the client that the first loan was paid off and provide the amortization schedule with the new payment amount to be implemented via payroll.  Payments are being made but the IC/TPA do not provide loan monitoring for this particular client.  Fast forward to October 2018 during the 5500 audit, the auditor picks up this loan for his sample and discovers that while payments were made timely, the amount was incorrect.  How does this get corrected?  Would this loan be considered in default, even though payments have been made timely just in the wrong amount?  Does the plan need to file under VCP?  Can the loan be re-amortized so that the loan is paid off by the end of 5 years? 

[Mike Preston]

I would have to see what the loan amounts were, terms of the loan, etc. before being sure, but I would expect that unless the loan payments were ridiculously low as long as something was paid each payroll that the loan is not in default. A simple spreadsheet should be able to prove it.  So what if the participant is a bit behind in the amount due?  Calculate the amount that the participant should deposit to bring the loan up to date, have that deposited and change future payments to the correct amount.  Easy, peasy.

[Larry Starr]

5 hours ago, bevfair said:

Plan allows for 1 loan at a time.  Participant has a loan, which he took out in 2014 with a weekly payment of $31.38.  In August 2017, the Participant contacts the Investment Company, pays off the loan and requests a new loan.  New payment amount is $140.53.  The TPA approves the loan and it is then approved by the Plan Sponsor.  The entire process is done electronically.  Participant is not married so there is no spousal consent and thus no physical paperwork is generated for the request until the loan is approved and the IC sends a confirmation report to the participant which contains the terms of the loan.  This is a standard procedure.  TPA and IC notify the client that the first loan was paid off and provide the amortization schedule with the new payment amount to be implemented via payroll.  Payments are being made but the IC/TPA do not provide loan monitoring for this particular client.  Fast forward to October 2018 during the 5500 audit, the auditor picks up this loan for his sample and discovers that while payments were made timely, the amount was incorrect.  How does this get corrected?  Would this loan be considered in default, even though payments have been made timely just in the wrong amount?  Does the plan need to file under VCP?  Can the loan be re-amortized so that the loan is paid off by the end of 5 years? 

Recommendation for anyone posting on this service, PLEASE provide ALL DETAILS on your situation. Here, we have no information on the loan details; besides the amount of the loan. how much was he paying and what was the amount supposed to be?  Mike noted the issues based on his best guess (which is usually pretty damn good!), but when you post questions to this forum, please give us MORE info than you think we need, rather than bare bones. The specifics often make big differences in the appropriate response.

[bevfair]

2 hours ago, Mike Preston said:

I would have to see what the loan amounts were, terms of the loan, etc. before being sure, but I would expect that unless the loan payments were ridiculously low as long as something was paid each payroll that the loan is not in default. A simple spreadsheet should be able to prove it.  So what if the participant is a bit behind in the amount due?  Calculate the amount that the participant should deposit to bring the loan up to date, have that deposited and change future payments to the correct amount.  Easy, peasy.

My apologies for not providing more information.  The first loan had 5 year term, with a repayment amount of $31.38 and was paid off early so that the participant could take the second loan (plan only allows for 1 loan at a time).  The second loan also had a 5 year term, with a repayment amount of $140.53.  Even though the client was advised of the new loan/new payment amount, and also advised of the fact that the first loan had been paid off and to start the new payment amount accordingly for the new loan (loan 2), they continued to withhold $31.38 as a loan payment.  So essentially, they continued paying the loan 1 repayment amount but applied it to loan 2, rather than withholding and repaying the correct repayment amount to loan 2.  I hope that fills in the gaps and doesn't muddy the waters.  Thank you for your insight.

[Mike Preston]

So much for easy peasy! It looks to me like the loan went into default around the end of 2017.  It is very close between 12/31/2017 and 3/31/2018 so the particulars matter: actual interest rate applicable, plan provisions (or loan policy) regarding timing of default, how much is due on late payentsm etc.

So, you need to check your loan policy and plan provisions to figure out the details, but with it going into default you can only correct through EPCRS (somebody check me on this).  And, yes, reamortization of the amount outstanding over a period that doesn't extend beyond 5 years from August 2017 (the loan origination date) should be easily approved.