Loan Repayment of Deemed Loan

Plan sponsor discovers in 2018 they did not start payments on a loan from June, 2017.

They would have considered VCP, but with the fee going from $300 to $3000, they are going to treat the loan as a deemed distribution.

The loan plus accrued earnings remains outstanding, but is the employer permitted to force the participant to begin making payments, or is that strictly voluntary on the part of the participant?

If repayments are to start, is there any reason to reamortize to keep the loan within the original 5 year payback, or can the original loan payments be started without adjustment, since the loan is already defaulted?

Thanks.

Employer cannot force the participant to begin making payments.  Once the loan is delinquent and goes beyond the cure period, then the loan is deemed and tax reported and as you noted the loan plus accrued earnings remaining outstanding.  There would be basis in anything repaid after the deeming of the loan.

Thanks.  I'm looking at a section in the EOB called, "Obligation to repay not waived because of deemed distribution".

In that section Sal states, "In fact, there is still a fiduciary requirement to enforce the loan, since ERISA requires the governing documents of the plan be followed (e.g., the written loan provisions or loan policy that is part of the plan), and to protect the benefits of the plan participant."

If the loan procedures require that loans must be repaid through salary deductions, would the plan sponsor be required to, or at least have the authority to, require the repayment of the loan per the loan procedures even if payments are started after the cure period due to the error?

I interpret that to mean there is a fiduciary requirement to continue to enforce the loan after a deemed distribution until the loan is repaid either by resuming the loan payments or by offset against the participant's accrued benefits.  The plan sponsor can require that loans must be repaid through payroll, but there is nothing to prevent the participant from revoking this.  The employer discovered that they did not start loan payments in June 2017.  They elected not to go through EPCRS due to cost and instead deemed the loan and tax reported.  The loan plus accrued earnings continues to be outstanding and owed to the plan which is proper.  I cannot see the plan sponsor now starting repayment of this loan through payroll deduction without the participant authorizing the plan sponsor to do so.  What level repayment is going to be deducted - the amount agreed to in June 2017 with a balloon payment at the end or a re-amortized amount that the participant did not authorize possibly creating an undue hardship to the participant?  Just my two cents.

I see, so where I was thinking "enforce the loan" meant enforcing the terms of the loan note, which clearly were already violated by the plan sponsor, you're saying "enforce the loan" means following the rules regarding a deemed loan with respect to the balance remaining outstanding and interest accruing.

And that certainly answers my second question regarding what would the loan payments amounts be going forward.

Thank you very much.

You're welcome - that's my two cents...which is about close to what it is worth...maybe a little less.

In administering loans, it's important to understand loan deductions are not pre-empted by federal law.  So, a loan repayment agreement entered into by a participant, in many states, is a matter of state payroll law and is voluntary.  Voluntary stopping of loan repayments is even allowed in many states as a voluntary deduction.  Of course, this action would cause the loan to immediately default if no alternative to make repayments outside of payroll deduction.

The deemed distributed loan would continue to require repayment, but the employer/sponsor would not be allowed to force repayments be made from payroll.  The deemed distributed loan would be considered an outstanding loan for any plan with a maximum number of loans outstanding.  So, a plan allowing only 1 outstanding loan would count the unpaid deemed distributed loan.

Thanks for the additional confirmation CJ.

Not to get off on a tangent, but how far can the participant push it in a state that allows voluntary stopping of loan repayments?

If the plan's loan procedures require repayments by payroll deduction, and the participant voluntarily enters into a loan note that indicates such, do they retain the right to stop those payments at any time?

It is my understanding that they do in California.

Yes.  In many states, payroll deductions may cease by written directive at any time unless legally protected (eg., garnishments).  I've never really advertised participant rights in the matter, and the loan would be immediately in default if requiring payroll deduction.

16 hours ago, Gilmore said:

Thanks for the additional confirmation CJ.

Not to get off on a tangent, but how far can the participant push it in a state that allows voluntary stopping of loan repayments?

If the plan's loan procedures require repayments by payroll deduction, and the participant voluntarily enters into a loan note that indicates such, do they retain the right to stop those payments at any time?

How far can a participant push it?  All the way!  It is a very bad idea to ignore the participants directions.  

We had a pretty detailed discussion about it last year

The loan can be secured by an assignment of pay at the time of loan initiation.  The security arrangement operates apart from the statutes concerning payroll deduction. Most plans are either unaware or unwilling to take the administrative steps to effect the arrangement.  That leaves them to deal with the payroll deduction statutes.  Those statutes do not uniformly allow employees unfettered ability to cancel payroll deduction - they vary.

Thanks for the link to the prior discussion.

Does anyone know of any IRS guidance/opinions on the topic. 

Is there a problem for the plan administrator with honoring the participant's request to stop making loan payments and at the same time following the plan's inservice distribution provisions?

Can an owner or other Key Employee also request that their payments be stopped?

Thanks.