CV loan extenstion/reamortization

[Bird]

Notice 2020-50

Am I the first one to see this?  

Under this safe harbor, a qualified employer plan will be treated as satisfying the requirements of § 72(p) pursuant to section 2202(b)(2) of the CARES Act if a qualified individual’s obligation to repay a plan loan is suspended under the plan for any period beginning not earlier than March 27, 2020, and ending not later than December 31, 2020 (suspension period). The loan repayments must resume after the end of the suspension period, and the term of the loan may be extended by up to 1 year from the date the loan was originally due to be repaid.

"I was wrong."  They even said you can do the crazy thing of suspending through Dec 31, making the regular payments until the 1 year mark for the suspension, and then reamortize what is left.  "I was totally wrong."  At least we know what we have to do.

[C. B. Zeller]

29 minutes ago, Bird said:

"I was wrong." 

Same here! But I would rather have been wrong and know it, than be maybe right but have no idea.

[RatherBeGolfing]

39 minutes ago, Bird said:

Am I the first one to see this?  

Still reading it lol

[Luke Bailey]

On ‎6‎/‎19‎/‎2020 at 11:51 AM, Bird said:

They even said you can do the crazy thing of suspending through Dec 31, making the regular payments until the 1 year mark for the suspension, and then reamortize what is left.  "I was totally wrong."  At least we know what we have to do.

Yeah, but what they mostly said is that they are providing you with an easy peasy safe harbor of (a) suspending through end of 2020, (b) starting repayments again in January, 2021, (c) extending the loan term out for the lesser of a full 12 months or the date 12 months from the date its original 5-year term would have expired, and (d) doing just one new amortization schedule so that all the payments beginning with the January, 2021 resumption date are the same amount. They noted that other approaches could be defended as consistent with the statutory language, but would be more complex and they did not bother describing them, since the safe harbor will be better in almost every instance.

[Albert F]

I do not agree that Bird was wrong.  IRS Notice 2020-50 presents what it characterizes as a safe harbor approach and an alternative approach for determining the level payment amortization schedule if a plan loan borrower takes advantage of the delay in plan loan dates between March 27, 2020 and December 31, 2020.  I agree with Luke that the safe harbor approach is easy peasy to use, as is the alternative that Bird focused on.

                  However, neither approach is consistent with the CARES Act, as can be seen by changing the safe harbor example slightly. The Notice’s safe harbor example seems to assume that plan loan payments that were otherwise due on the final day of each month between July 1, 2020 and December 31, 2020 were all suspended. This would imply six monthly payments were suspended. 

            a)     Assume the loan would otherwise have been paid in full on December 31, 2020.  There would seem to be little question about the new level payment amortization schedule.  Six monthly payments would be due on the final day of each month between July 1, 2021 and December 31, 2021.  The required payments would be increased by the interest that accrued during the one-year delay.  However, the safe harbor approach generates a different level payment amortization schedule. Twelve smaller monthly payments would be due on the final day of each month between January 1, 2021 and December 31, 2021. That violates the requirement of CARES Act, §2202(b)(2)(A) that those due dates be each extended by 1 year. In contrast, the alternative approach presented by the IRS yields the correct level amortization schedule.

             b)    Assume the loan would otherwise have been paid in full on January 31, 2021.  It is far from clear how to determine the new level payment amortization schedule.  However, the safe harbor approach would generate the following level payment amortization schedule. Thirteen smaller monthly payments would be due on the final day of each month between January 1, 2021 and January 31, 2022. That again violates the one-year extension requirement of CARES Act, §2202(b)(2)(A).  The alternative approach presented by the IRS would generate the following level payment amortization schedule.  The original required January 31, 2021 payment requirement would be unchanged, and the same six monthly payments that were due on the final day of each month between July 1, 2021 and December 31, 2021 under the earlier hypothetical would still be due.  However, I suspect the reason Bird believes this is crazy is because it violates the requirement of CARES Act, §2202(b)(2)(A) that “any subsequent payments with respect to any such loan be adjusted” to reflect payment delays and interest accruals.

 

Thus, if the law is not amended plan advisors are left with a conundrum. Do we advise our clients to follow guidance of the IRS, which is the agency responsible for enforcing the loan repayment provisions even though such guidance is not consistent with statute?  If we wish to advise following the guidance, do we recommend using the safe harbor, the alternative approach, or a reasonable approach that is consistent with the statute?

 

[Luke Bailey]

30 minutes ago, Albert F said:

Thus, if the law is not amended plan advisors are left with a conundrum. Do we advise our clients to follow guidance of the IRS, which is the agency responsible for enforcing the loan repayment provisions even though such guidance is not consistent with statute?

Yes. I'm not convinced anyone can make complete sense out of the statute. Do you want to try to explain this to a client, including telling them that the IRS has provided an easy, "safe harbor" way that you are telling them they might not want to follow?

 

[RatherBeGolfing]

1 hour ago, Albert F said:

Do we advise our clients to follow guidance of the IRS, which is the agency responsible for enforcing the loan repayment provisions even though such guidance is not consistent with statute?

Yes.  I think reasonable professionals can disagree on the word by word interpretation of the statute, so I'm not convinced that the guidance is necessarily inconsistent with the statutory language, or the statutory intent.

[Albert F]

        Many thoughtful advisors , like Luke and Rather be Golfing, find the statute ambiguous. This suggests two other solutions to the conundrum. Why not ask the IRS to address the examples I presented or any other examples that other observers find troubling? We could then determine if the IRS stands by its safe harbor approach in such cases.  Why not ask Congress to clarify the statute?

[Bird]

17 hours ago, Albert F said:

However, I suspect the reason Bird believes this is crazy is because it violates the requirement of CARES Act, §2202(b)(2)(A) that “any subsequent payments with respect to any such loan be adjusted” to reflect payment delays and interest accruals.

Not at all; my "crazy" description is just regarding the idea that a payment due, say, April 1, 2020 is postponed a year, but a Jan 1, 2021 payment is still due then, and the complications arising from all that.  I choose not to make things difficult and will just reamortize loans when payments restart, not later than Jan 1 2021.  It's not that big of a deal; sometimes clarity is worth more than some additional leniency.  And you can ask the IRS and Congress to clarify all you want, then you're in limbo again waiting for the to answer (or not, which seems more likely).  I repeat, it's not that big of a deal...

[Belgarath]

AMEN!!!

[RatherBeGolfing]

9 hours ago, Albert F said:

Why not ask Congress to clarify the statute?

Because it very rarely happens (better chance of winning the lottery and being in a plane crash on the same day).  Emergency legislation like CARES is often recycled with the exception of dates.  The same sort of goes for agency guidance.  The starting point for DOL & IRS "what guidance have we issued for similar situation in the past" and then "what is different this time, and what didnt work last time".  

 

10 hours ago, Albert F said:

Why not ask the IRS to address the examples I presented or any other examples that other observers find troubling?

What makes you think that this wasn't done?  Guidance on legislation doesn't just happen in an IRS vacuum. Regulatory agencies ask stakeholders input all the time, and this is in addition to all the unsolicited input.  Im sure they looked at plenty of scenarios, but the safe harbor is a very simple solution.  I would probably call the guidance "not inconsistent" with the statutory language rather than consistent.

[Luke Bailey]

Reminds me of when the iPhone 4 came out and, in the midst of "antennagate," Steve Jobs said, "It's just a phone."

It's just a 12-month loan extension. It was problematic when it was ambiguous and inconsistent, but now it's not. I have to think with everything going on any further issues with it are not going to make it on Congress's or IRS's to do list.

[Mike Preston]

I think anybody who suggests a client do something other than the safe harbor method is, as a simple country actuary friend of mine is fond of saying, looking for a knuckle sandwich from the government, the client, the participant or another advisor.

[Luke Bailey]

8 hours ago, Mike Preston said:

I think anybody who suggests a client do something other than the safe harbor method is, as a simple country actuary friend of mine is fond of saying, looking for a knuckle sandwich from the government, the client, the participant or another advisor.

Mike, in my experience the IRS stops short of physical violence.

[C. B. Zeller]

9 hours ago, Luke Bailey said:

Mike, in my experience the IRS stops short of physical violence.

 

(For those readers not familiar with the bizarre world of 90s professional wrestling, the one in shirt and suspenders was known as "Irwin R. Shyster" or "IRS." His gimmick was that he was a tax collector and would go after other wrestlers who he accused of being tax cheats.)

[Luke Bailey]

14 hours ago, C. B. Zeller said:

 

(For those readers not familiar with the bizarre world of 90s professional wrestling, the one in shirt and suspenders was known as "Irwin R. Shyster" or "IRS." His gimmick was that he was a tax collector and would go after other wrestlers who he accused of being tax cheats.)

Thanks for that, C.B. And actually my answer to Mike was technically incorrect, because, kidding aside, sort of, I'm sure there are niche tax collection situations where it could be an issue, and they might need a guy like that. But I don't see it coming up in connection with a discussion about alternative loan amortization schedules.

[Mike Preston]

Would somebody please explain this to Luke? I don't have time.