Loan

A ppt is out on a leave of absence (medical for cancer treatment) currently.  They have an outstanding loan and the repayments were suspended for the leave up to one year.  It has been two months into the leave.  The ppt wants to refinance for an additional amount on the loan.  They have applied for SS disability and will find out in two months, if they qualify.  The plan uses SS determination for the def of disability.  The client does have some documentation from her doctor that this is a permanent disability.  Although, the ppt has told them that she wants to come back to work and has not quit.

So, is there any reason not to allow the refi?  My concern was is this a bona fide loan for the refi.  If there is documentation from a doctor on permanent disability and she applied for it with SS, then will she ever make a repayment or have the ability to payoff the loan?  Of course, who is to say she cannot make a pre-payment via check before the one year suspension is up.  The loan program allows for a total repayment via check.   Otherwise, repayment is via payroll deduction.

Thoughts?

I don't know if there are any clear guidelines on this. I would say that if they are expected to return to work before the end of the 1 year suspension then it is probably ok. If they are not expected to return within that timeframe, then either a) you are expecting them to repay the entire balance by check before the end of the 1 year period, which might be seen as a violation of the level amortization requirement, or b) you are expecting the loan to be deemed (and possibly offset, depending on the determination of disability) which would make it not a bona fide loan.

However you have to be careful if you do not allow the refinancing, assuming the participant is NHCE, you could run afoul of nondiscrimination with respect to availability of benefits, rights and features.

This is a sticky situation and is a good example of why plan sponsors might want to consider not allowing refinancing in their loan programs. I am curious to hear how others have addressed similar situations.