EPCRS Loan Correction

[austin3515]

Looking at ECPRS 6.07:  

Quote

"However, these correction methods are not available if the maximum period for repayment of the loan pursuant to § 72(p)(2)(B) has expired."

Question 1

72p2B on its own references exclusively the 5 year term.  But regs for 72p2C is what provides the grace period. I have a loan for which the 5 year term expired in June 2019. Are we entitled to use a grace period as well, giving us until 9/30/2019?  Admittedly I’m having trouble getting there…

Question 2

And then as a follow up, if that is not available, 6.07(2) seems to suggest that even if the loan was deemed in 2017, we can “cancel” the 2017 1099-R that was issued by the recordkeeper, have the employer fund any applicable withholding, and issue a new taxable 1099-R for 2019. Am I reading that correctly?  Everything at issue here was clearly not the fault of the participant (there is general agreement that the recordkeeper let us down).
 

[Bri]

I'd think you can combine them on part 1, no?

The final loan payment was due within 5 years, and each payment (including the final one) has its own grace period for timeliness.  I think A-10 in the 1.72(p) regs is good enough for that.

[austin3515]

56 minutes ago, Bri said:

I'd think you can combine them on part 1, no?

Could you be more specific, I'm afraid I don;t know what you mean here?

Quote

The final loan payment was due within 5 years, and each payment (including the final one) has its own grace period for timeliness.  I think A-10 in the 1.72(p) regs is good enough for that.

Believe me, I want this to be the answer.  But wouldnt the grace period be moot once the loan actually goes into default? i.e., once the grace period was exceeded after the first missed payment? For my case that was in 2018, so I'm way past the applicable grace period.  Do you agree?  What do others think? 

[Bri]

I only meant to combine the two parts of the argument, first that the loan requires 5 years, and second where it defines a grace period.

"For purposes of section 72, a deemed distribution occurs at the first time that the requirements of Q&A-3 of this section are not satisfied, in form or in operation. "

The loan didn't fail 72p because the loan had an actual term longer than a 5-year term, so I'd argue that it failed 72p only then when the level amortization (of 72p2C) went out the window, but that only occurs as of the end of that cure period. 

 

[RatherBeGolfing]

1 hour ago, austin3515 said:

i.e., once the grace period was exceeded after the first missed payment? For my case that was in 2018, so I'm way past the applicable grace period.  Do you agree?  What do others think? 

Yea I tend to agree.  If a 2018 payment was missed and not corrected during the cure period, the loan should be defaulted.  You could still correct it it through EPCRS tho. 

3 hours ago, austin3515 said:

I have a loan for which the 5 year term expired in June 2019. Are we entitled to use a grace period as well, giving us until 9/30/2019?

Most likely yes.  The cure period and the term of the loan are two separate issues.  IRS has informally agreed with this position at a past ASPPA Annual Q&A.

[austin3515]

RBG, your two statement sin the previous post don;t seem to line up?  Both of my quoted posts are for the same loan.  The las tpayment on the loan was made in 2018, so my grace period expired 12/31/2018 without correction.  My 5 year term is up June 2019.  Because there is no additional grace period available, aren't I in the situation where even full repayment "today" will not address the issue?  i.e., I don;t have until 9/30/2019 to correct, right?  My only option under EPCRS is to treat the loan as a taxable distriubtion in 2019 and have the employer pickup the taxes?

[Luke Bailey]

austin3515, are your Questions 1 and 2 dealing with the same loan, or two different loans and two different problems? I have potential answers to your questions, but am confused on that point.

Re Question 2, standing alone, austin 3515, I have puzzled over this language myself. It does seem to me like what the IRS is saying is that if you inadvertently failed to report a deemed loan, say in 2017, you can "correct" by issuing the 1099-R for the deemed loan for the year in which you discover the error and correct, say 2019. I wish they had made that clearer, though, e.g. with an example. Also, as I recall it is not completely clear from the language whether, if in this example you don't correct until 2019, you would have to include the additional accrued interest from 2017 through 2019 in the 1099-R. I am inclined to think not.

[austin3515]

Thanks Luke!  Yes it is the same loan.  The loan in question is within the 5 year period only if I get to extend the 5 year term by the grace period (again, I don't think it does, but I really really want it to).

And then if I do not get to extend the 5 year term by the grace period, now I am outside the 5 year window and it seems to me my only option (aside from "sticking it" to the participant) is for the employer to pay the withholding and report the income in 2019 on a 2019 1099-R.  

I hope that clarifies... 

[Luke Bailey]

austin3515, the 5-year loan term means you cannot extend the loan beyond five years if you need to to reamortize and say it never defaulted. It seems to me that the loan you describe defaulted when the grace period ran out on the missed payment in 2017, so your solution, if there is one, is in Question 2.

[austin3515]

I cant decide if I should be happy you think I concluded correctly or disappointed because the correction is more onerous!

[austin3515]

Luke, to be abundantly clear, the grace period in the regs applied only to extending the initial date of the default.  The grace period just doesn't have anything at all to do with the expiration of the 5 year term. 

I guess what I'm saying is there is just no way in the world to link the grace period on the back of the 5 year window.  Is that correct?

Theoretically I could  get the employer to fund full repayment of the loan, thus eliminating the need for amortization.  I.e., the loan could be fully repaid "today".

Maybe its worth a shot on a VCP filing.

[RatherBeGolfing]

1 hour ago, austin3515 said:

RBG, your two statement sin the previous post don;t seem to line up?  Both of my quoted posts are for the same loan.  The las tpayment on the loan was made in 2018, so my grace period expired 12/31/2018 without correction.  My 5 year term is up June 2019.  Because there is no additional grace period available, aren't I in the situation where even full repayment "today" will not address the issue?  i.e., I don;t have until 9/30/2019 to correct, right?  My only option under EPCRS is to treat the loan as a taxable distriubtion in 2019 and have the employer pickup the taxes?

I missed the part of it being the same loan...  So, the loan defaulted in 2018 and should have been a deemed distribution in 2018.  Under EPCRS, you can deem it in 2019 and issue a 2019 1099-R rather than go back to 2018.  You don't have to deem it in 2019 though, you could still issue a 2018 1099-R.

For the second part of the question, what I was saying was that the cure period does not actually extend the loan.  If your last payment is due on the 5 year day, and the payment is made 30 days after that, you still have not exceeded the 5 year maximum.  

In your case though, we are already past the 5 year mark.  I dont think you can correct by re-amortizing retroactively.  In other words, if your correction is to re-amortize and pay the loan off in order to avoid a deemed distribution, that new payoff date cant fall outside of the 5 year window because your scheduled payment exceeds the maximum term.  You cant correct by saying I will pay a lumpsum 30 days ago but since we are still within the cure period I can deposit today.

If you had a day left on the maximum term, you could correct by saying pay the lumpsum tomorrow, but actually make the deposit within the cure period and be ok.

Does that make more sense?

 

[RatherBeGolfing]

35 minutes ago, Luke Bailey said:

It does seem to me like what the IRS is saying is that if you inadvertently failed to report a deemed loan, say in 2017, you can "correct" by issuing the 1099-R for the deemed loan for the year in which you discover the error and correct, say 2019.

Correct.  Before the SCP option, you had to go through VCP in order to issue a 1099 in the year of correction rather than the year it actually deemed.

[RatherBeGolfing]

19 minutes ago, austin3515 said:

Theoretically I could  get the employer to fund full repayment of the loan, thus eliminating the need for amortization.  I.e., the loan could be fully repaid "today".

don't you have to re-amortize all the payments where the cure period has expired though?  I don't think we get around the amortization problem by a lumpsum of payments if they are outside the individual payments cure period, can we?

 

[austin3515]

8 minutes ago, RatherBeGolfing said:

For the second part of the question, what I was saying was that the cure period does not actually extend the loan.  If your last payment is due on the 5 year day, and the payment is made 30 days after that, you still have not exceeded the 5 year maximum. 

I'm sorry if I'm being dense here, but why are you saying I could repay in a lump-sum within 30 days of the end of the 5 year term?  Or are you just saying that in the case of a 5 year loan with NO problems, making the last payment 30 days late wont go into default?

[austin3515]

4 minutes ago, RatherBeGolfing said:

don't you have to re-amortize all the payments where the cure period has expired though?  I don't think we get around the amortization problem by a lumpsum of payments if they are outside the individual payments cure period, can we?

But I can't reamortize because the 5 year period has expired.  In other words, it makes perfect sense that I cant use the reamortization option.  But I could use the lump-sum payment option (subject to the following).  But again this only applies if somehow we can conclude that I have until the last day of the quarter folllowing the end of the 5 year period.  If I have until 9/30/2019 to full repay the loan and avoid any taxation, then I still have time.  IF I don't then my last hope expired in June 2019. 

I just don't see how I get until 9/30/2019 to repay the loan as a nontaxable that could be but hopefully one of you does!.  This is really the crux of the question at this point.  Is there any hope today of having this loan corrected without taxation, now that we are 2 months past the end of the 5 year period? 

[RatherBeGolfing]

20 hours ago, austin3515 said:

But I can't reamortize because the 5 year period has expired.  In other words, it makes perfect sense that I cant use the reamortization option.  But I could use the lump-sum payment option

I agree you can't re-amortize.  But if you can't re-amortize after the 5 year period has expired, why would you be able to correct with a lumpsum? I think the only payment that can be made after the maximum term of the loan is a payment that still has a cure period.

I think the only options you have are

1.  Deem and 1099 in the year of default (2018)

2.  Deem and 1099 in the year it was discovered (2019)

[RatherBeGolfing]

21 hours ago, austin3515 said:

I'm sorry if I'm being dense here, but why are you saying I could repay in a lump-sum within 30 days of the end of the 5 year term?  Or are you just saying that in the case of a 5 year loan with NO problems, making the last payment 30 days late wont go into default?

Im saying that making the last payment (or payments) after the 5 years is fine as long as its within the cure period for those payments.  So if you had at least 1 day left on the loan term you could say "correct by lump sum on the last day of the loan", and then make the deposit at some point during the cure period and be fine.  I don't see that as an option the loan term is already over.

 

[austin3515]

1 hour ago, RatherBeGolfing said:

I agree you can't re-amortize.  But if you can't re-amortize after the 5 year period has expired, why would you be able to correct with a lumpsum? I think the only payment that can be made after the maximum term of the loan is a payment that still has a cure period.

I think the only options you have are

1.  Deem and 1099 in the year of default (2018)

2.  Deem and 1099 in the year it was discovered (2019)

Thank you, this was absolutely crystal clear and it is also my interpretation.  Thanks again!!