Jump to content

Loan correction $50,000 limit


BST

Recommended Posts

Maximum participant loan (residential) was granted at the end of 2021.  Due to turnover at the plan sponsor repayment was not set up.  Error was detected during 2022 plan audit.    Recordkeeper is proposing correction by amortizing the loan over the remaining term using the original $50,000 loan as the loan balance with interest only payments until the accrued interest is repaid (entire amount of loan payment applied to interest for the next 13 months).  Is this permissible or should the current accrued interest be repaid to the plan now?   With accrued interest the balance is about $53,000.  if this loan was not already at the maximum limit, I believe their correction would be appropriate.   However, I am not sure it is OK when the loan plus accrued interest is over $50,000.   Any guidance would be appreciated, I can't seem to find anything that is on point.   

Link to comment
Share on other sites

Given the circumstances and the correction reference from Belgarath, it sounds like the participant cannot catch-up the missed payments by making a lump sum payment which leaves them with re-amortizing the loan over the remaining term of the loan.  This is consistent with the requirement that loans need to be paid using a level amortization.  I think you have sufficient information to tell the recordkeeper that the part of their proposed correction to make interest-only payments is not appropriate.

I don't think there is an issue of the loan exceeding the $50,000 limit.  The limit is applicable only to the principal amount.  The additional amount is due to interest which will be factored into each repayment as part of the re-amortization.

Link to comment
Share on other sites

thanks for your help and clarification on this.  the entire balance with the accrued interest needs to re-amortized.  applying all payments to interest for the first year plus is not a fix.   No issue with the amortization schedule amortizing a balance over $50,000 because the interest accrued is also being amortized.     

Link to comment
Share on other sites

One other thing to mention is that if the employer is responsible for the loan error, EPCRS states that the employer should contribute to the participant’s account an amount equal to the interest that accumulated because of the error.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...