Participant Loan of a Dying Employee

Hi to All,

We just got a phone call from HR lady of our client to say that a certain participant who has a participant loan is in the process of dying of pancreatic cancer and has been out on medical leave for the last 6 months.  He's not really expected to ever come back to work, but she hasn't really officially declared him to be terminated, either.

The participant took out a participant loan on 12/18/2018 in the amount of $11,650.00.  He made two bi-weekly payments of $119.40 on  01/14/2019  and  01/22/2019.  He went out on medical leave at that point and has not made any more payments.  This quarter ending June 30 is his cure period and so far he hasn't made a payment.

HR lady wants to know what his options are.  Can he make some little tiny payment like $100 and get another cure period running July 1 to September 30th?  Could he do that twice and thereby keep his loan from going into default in 2019?  I think she's asking if he can just keep this thing running until he actually passes away and then it becomes someone else's issue at that point.  All the situations I have seen so far were "all or nothing" - the person was either making payments, or stopped.  I don't know what happens when someone pays a little something but not enough to bring a loan up to date.  Of course I know that the loan is supposed to be paid within 5 years of the loan initiation date, but does it get re-amortized each quarter, with higher payments, such that it would still be paid off theoretically within the original 5 year period?  Is that even permissible?

He could, of course, just let it default and pay the taxes on the deemed distribution at the end of 2019 if he's still alive and has the money to pay them.

Any of your thoughts and experiences will be appreciated.  Thanks in advance!

To prevent the default he would have to catch up on all of the missing first quarter payments by June 30.  If he's over 59 1/2 I don't think I would worry about it at all; if under, just convince whoever is preparing the 1099-R to code it with an exception for disability and move on.  

Thanks, Bird!  That's the part I didn't know - that the loan has to be brought completely current in order to prevent the default.  Good idea on the 1099-R - hadn't thought of that yet.

Hi again Bird,

A little more information became available.  The man is only 47.  The loan was actually financed originally for 2 years, not 5.  Someone else in the firm came along and said to check to see what the loan policy of the document says about repayments during a leave of absence and indeed, there is a checkbox that is marked, saying that repayments are suspended during a leave of absence.  So the decision was made to just let the loan rock on, accruing interest, and deal with it when the man actually dies or when the employer changes his status to terminated instead of being out on leave of absence.

Thanks just the same!

Leave of Absence suspension of payments does not last forever. Only up to one year. Then at the end of the if he is still alive he will have to make up 1 year's worth of payments or else it will default. 

401king, thanks.  I was wondering about that.  I didn't want to annoy people by asking TOO many questions this morning so I didn't say anything but it stood to reason that you can't go indefinitely on LOA.