Consolidating Loans

[Stash026]

I have a client that wants to allow participants to consolidate loans (take two loans and make them into one).  I don't see my plan document/loan policy software addressing this.  Does anyone have any guidance as to the language to put in to allow it?

[Larry Starr]

You need to provide us much more information.  It is always preferable to give us the specific details of the specific situation along with the specific plan provisions that you do have.

So, do you have a participant with two outstanding loans?  What are the specifics of each loan?

What does the plan say with regard to loan limitations (how many loans at one time, etc.)?

I doubt you an do what is being suggested.  However, if the plan allows and if the numbers work, one possibility it to take a new loan that pays off the two existing loans (this assumes you don't exceed any loan limitation, but you didn't give us the necessary info to know if that is possible).

I'm going to leave it at that until you provide the gory details as requested above.

And for everyone else who lurks out there....

ALWAYS ALWAYS ALWAYS give us ALL the details; our business is completely fact specific, and without all the facts on a situation, we are just wasting our time trying to cover every possibility of what MIGHT be the question.  

[Stash026]

Sorry:

Plan currently limits to three outstanding loans at a time.

Person in question has three loans outstanding (estimated current outstanding balances?

1. $5,000 to be paid off in 2 years
2. $7,500 to be paid off in 3 years
3. $4,000 to be paid off in 4 years

The current investments are $50,000 so if the plan had allowed more than 3 loans there would be an available balance for an additional loan.  I think the client basically wanted to do it as a work around to allow a fourth loan.  Generally I would've just said no, but the investment provider had told them that they could which surprised me.  

Thanks and any insight would be appreciated!

[Luke Bailey]

Most likely the sum of the highest outstanding balances in last 12 months was < $16,500, so as Larry indicated above, do a new loan for that amount. Can be for any period up to 5 years. Arguably, because this would be a fourth loan outstanding for a nanosecond, would need to change plan rule that can only have 3 loans, although you might be able to interpret you way out of that problem.

[Lou S.]

The IRS published some lengthy rules on refinancing and consolidation if I remember correctly. When you do refinance and or consolidate you need to be careful that you don't extend any of the loan you are consolidating or refinancing past the original 5 year period of the loan that is being rolled into the new loan.

[Luke Bailey]

Stash026, what Lou S. is referring to, I think, is Treas. reg. sec. 1.72(p)-1, Q&A-20. On your facts, you should not have a problem because the sum of the new loan and old loans is < $50,000.

[Larry Starr]

9 hours ago, Stash026 said:

Sorry:

Plan currently limits to three outstanding loans at a time.

Person in question has three loans outstanding (estimated current outstanding balances?

1. $5,000 to be paid off in 2 years
2. $7,500 to be paid off in 3 years
3. $4,000 to be paid off in 4 years

The current investments are $50,000 so if the plan had allowed more than 3 loans there would be an available balance for an additional loan.  I think the client basically wanted to do it as a work around to allow a fourth loan.  Generally I would've just said no, but the investment provider had told them that they could which surprised me.  

Thanks and any insight would be appreciated!

The correct answer IS no. You cannot pay off the three loans without instituting a fourth loan (which theoretically gives cash to the participant that he turns around and used to pay off his three existing loans).  So, amend the plan if you must to allow 4 loans. But I would be out of character to not suggest that this is an absurd situation and I can't imagine a good reason to allow 3 loans (or frankly, for most of my clients, ANY loans), yet alone 4 of them.  If they want to borrow money, go to the bank!

Oh, and the INVESTMENT PROVIDER told them they could? WHY?  Why not ask the UPS delivery guy; he/she knows as much as the investment provider about our business!!!!!!!  Ask the investment provider to put that in writing and see how fast they back away from their advice!