Is default at the end of the 5 year loan period or the end of the grace period if later?

I was wondering if  you could help with this question. I cannot find any definitive regulation or other site.  The 72(p) regulations do not discuss what happens if the cure period ends after the 5 year period.

My question is: on what date should {redacted participant name} Loan #2 be DEEMED? The end of his 5 yr. period is 7/10/17. Should the loan be deemed on 7/10/17, or can the grace period (qtr. end following of 12/31/17) extend BEYOND the 5 year max period?

And so question 2 is – if the end of the grace period can be used and the missed payment was not made, is it defaulted on 12/31/2017 or 1/1/18?

Regulation 1.72(p)-1  Q&A 10 - (no reference to the 5 year period)

Q-10: If a participant fails to make the installment payments required under the terms of a loan that satisfied the requirements of Q&A-3 of this section when made, when does a deemed distribution occur and what is the amount of the deemed distribution?

A-10: (a) Timing of deemed distribution. Failure to make any installment payment when due in accordance with the terms of the loan violates section 72(p)(2)(C) and, accordingly, results in a deemed distribution at the time of such failure. However, the plan administrator may allow a cure period and section 72(p)(2)(C) will not be considered to have been violated if the installment payment is made not later than the end of the cure period, which period cannot continue beyond the last day of the calendar quarter following the calendar quarter in which the required installment payment was due.

I found a cite where the IRS stated the cure period could apply to the last payment even at the end of the 5 year period - but it was from an IRS Q&A in 2003.

Does the cure period apply to the last payment due on the loan? A question often arises as to whether the cure period can apply to the last loan payment, even if that payment is due at the end of the maximum repayment period (usually 5 years) permitted under IRC §72(p)(2). According to IRS in a Q&A session conducted with the American Bar Association on May 9, 2003, the IRS says that it does apply to the last loan payment, too. See Q&A-1. In its response, the IRS says that the plan “can use a cure period even at the end of the sixty-month period.”

That's a great cite and I see no reason it is not applicable now.

Thanks, hope so!

How is this loan not deemed from inception? Isn't the repayment period beyond 5 years?

17 minutes ago, Mike Preston said:

How is this loan not deemed from inception? Isn't the repayment period beyond 5 years?

Yep

Good point

21 minutes ago, 30Rock said:

Good point

And while we are at it, might as well also answer the other question in the original post and that is with a cure period that runs through 12/31/2017 the deemed date would be 12/31/2017, not 1/1/2018.

That is, if the loan wasn't deemed on the day it was issued because of the 5 year thingy already mentioned.

Yes I saw that as well!

"Failure to make any installment payment when due in accordance with the terms of the loan violates section 72(p)(2)(C) and, accordingly, results in a deemed distribution at the time of such failure." 

I have always understood the regs to say the deemed distribution occurs at the time the payment is not paid when due.  The grace period allows for a retroactive cure of the deemed distribution, but if the installment is not paid by the end of the grace period, the deemed distribution is reported as of the date the installment was due but not paid.  

Good point. Edit: Well, I *thought* it was a good point.  It has since been refuted (see below).

On ‎3‎/‎4‎/‎2018 at 4:48 PM, ERISAAPPLE said:

"Failure to make any installment payment when due in accordance with the terms of the loan violates section 72(p)(2)(C) and, accordingly, results in a deemed distribution at the time of such failure." 

I have always understood the regs to say the deemed distribution occurs at the time the payment is not paid when due.  The grace period allows for a retroactive cure of the deemed distribution, but if the installment is not paid by the end of the grace period, the deemed distribution is reported as of the date the installment was due but not paid.  

 

1.72(p)-1 Q&A 10 addresses the effect of the cure period and gives an example. The regs aren't precise, but the example clearly says the deemed distribution happens at the end of the cure period.

Quote

 

Q-. 10.  If a participant fails to make the installment payments required under the terms of a loan that satisfied the requirements of Q&A-3 of this section when made, when does a deemed distribution occur and what is the amount of the deemed distribution?

A-10. (a) Timing of deemed distribution. Failure to make any installment payment when due in accordance with the terms of the loan violates section 72(p)(2)(C) and, accordingly, results in a deemed distribution at the time of such failure. However, the plan administrator may allow a cure period and section 72(p)(2)(C) will not be considered to have been violated if the installment payment is made not later than the end of the cure period, which period cannot continue beyond the last day of the calendar quarter following the calendar quarter in which the required installment payment was due.

(b) Amount of deemed distribution. If a loan satisfies Q&A-3 of this section when made, but there is a failure to pay the installment payments required under the terms of the loan (taking into account any cure period allowed under paragraph (a) of this Q&A-10), then the amount of the deemed distribution equals the entire outstanding balance of the loan (including accrued interest) at the time of such failure.

(c) Example. The following example illustrates the rules in paragraphs (a) and (b) of this Q&A-10 and is based upon the assumptions described in the introductory text of this section:

Example. (i) On August 1, 2002, a participant has a nonforfeitable account balance of $45,000 and borrows $20,000 from a plan to be repaid over 5 years in level monthly installments due at the end of each month. After making all monthly payments due through July 31, 2003, the participant fails to make the payment due on August 31, 2003 or any other monthly payments due thereafter. The plan administrator allows a three-month cure period.

(ii) As a result of the failure to satisfy the requirement that the loan be repaid in level installments pursuant to section 72(p)(2)(C), the participant has a deemed distribution on November 30, 2003, which is the last day of the three-month cure period for the August 31, 2003 installment. The amount of the deemed distribution is $17,157, which is the outstanding balance on the loan at November 30, 2003. Alternatively, if the plan administrator had allowed a cure period through the end of the next calendar quarter, there would be a deemed distribution on December 31, 2003 equal to $17,282, which is the outstanding balance of the loan at December 31, 2003.

 

17 hours ago, Kevin C said:

1.72(p)-1 Q&A 10 addresses the effect of the cure period and gives an example. The regs aren't precise, but the example clearly says the deemed distribution happens at the end of the cure period.

And operationally, this is the only thing that makes sense, because if you have a payment due in the last quarter and wait until the end of the first Q to determine if it is deemed, and in fact it is...your 1099-R is late if you want to do it retroactively.