Participant Loan - Cure Period

[52626]

1. Loan procedure has the standard cure period...... last day of the calendar quarter following the calendar quarter ......

2. Loan procedure states loan will become payable in the full on termination of employment

3. Employee has  an outstanding loan and terminated 7/10/2019.

 

Question:

Does the loan become due and  payable (taxable since the employee can not pay it back) as of the termination date.  Or does the plan sponsor have to wait until the end of the cure period (12/31/2019) to default the note?

 

thanks

 

[401king]

I don't know if I interpret "payable in full" as "Deemed Distribution." I would say this person has until 12/31/2019 to pay down the loan. 

[Larry Starr]

6 hours ago, 52626 said:

1. Loan procedure has the standard cure period...... last day of the calendar quarter following the calendar quarter ......

2. Loan procedure states loan will become payable in the full on termination of employment

3. Employee has  an outstanding loan and terminated 7/10/2019.

 

Question:

Does the loan become due and  payable (taxable since the employee can not pay it back) as of the termination date.  Or does the plan sponsor have to wait until the end of the cure period (12/31/2019) to default the note?

 

thanks

 

Payable in full at termination means that there will no longer be payroll deductions to make loan payments nor will the plan continue to accept regular payments (even directly from the participant).  I would suggest the participant does have until the end of the cure period to come up with the cash to pay it off, and THEN it defaults.

[Luke Bailey]

52626, assuming that the plan provides that a distribution may occur following termination of employment, this will be a loan offset distribution, not a deemed distribution. Under the reg (1.72(p)-1, Q&A-13(a)(2)), a loan offset distribution is not necessarily tied to the deemed distribution cure period, but rather is determined by the terms of the loan. For example, many plans provide that the loan is offset sooner than the "quarter after the quarter" rule, e.g. giving the terminated employee 30 days after termination, or requiring the offset at the date of distribution of the rest of the account, if sooner. Also, note that the "quarter after the quarter" rule is not mandatory, but just the longest cure period you can have. See Treas. reg. 1.72(p)-1, Q&A-10(a) ("may allow...."). If you can't find a different rule in the loan agreement or loan policy, it wouldn't hurt to use the "quarter after the quarter" rule, but you would want to offset before that if the participant takes a distribution of rest of account, so you could withhold the 20% tax on the loan offset from the cash portion of the distribution.