Loan Default on 12/31/2020

[Gilmore]

I'm wondering if this is a possible upcoming issue with respect to loan defaults.

Assume a plan is not allowing participants to suspend their loan payments (I think the IRS Q&A said this was optional?).

Loan program allows a grace period to the end of the quarter following the quarter in which the payment was missed. 

If I'm laid off in the second quarter due to the coronavirus, my loan would default 9/30/2020, and I could claim the defaulted amount as a CRD.

If I'm laid off in the 3rd quarter due to the coronavirus, my loan would default on 12/31/2020, one day after the last CRD is allowed?

I'm probably missing something here so fire away!

[Luke Bailey]

1 hour ago, Gilmore said:

If I'm laid off in the 3rd quarter due to the coronavirus, my loan would default on 12/31/2020, one day after the last CRD is allowed?

Gilmore, I think it depends on what the plan's loan policy provides and how early in the 4th quarter the individual is laid off. Many plans' loan policies will provide that if the loan is no longer being paid by payroll withholding, it will come due in a balloon payment, e.g. 30 days after the individual terminates. Where that is the case, the loan offset distribution would occur at the end of the thirty days and the loan offset distribution would fall within the Cares Act period unless the individual terminated on or after December 1, 2020. In your example you are positing that under the plan's loan policy the loan does not default until the end of the longest permitted grace period under the loan regs. In the case of a plan that did have such a loan policy, as expressed in its loan documents, I think your analysis would be correct and an individual who was laid off after June 30, 2020 would not qualify. I suppose the IRS could change this result in guidance, e.g. say that because it is aware that plans do not have a uniform policy as to when a default occurs, it will treat any loan offset distribution that occurs in 2020 as a CRD.  It probably should do that.

[Gilmore]

Thank you for the reply Luke.  Our document's loan procedures say:

"The "cure period" is the repayment period allowed by the Plan Administrator which will not extend beyond the last day of the calendar quarter
following the calendar quarter during which the last scheduled installment payment was due and not paid."

I'm assuming then since it does not specifically say the last day is the default day, the Plan Administrator could default the loans on 12/30.

[Luke Bailey]

Gilmore, that would appear to be a reasonable interpretation. You would likely want to have the Plan Admin'r adopt a uniform written policy.