Loan Repayments Can Be Manufactured Up Without Getting Taxed
An inside income provider (IRS) Chief Counsel Advice memo issued to aid counsel in another of the agency’s regional offices prov
The memo, dated August 30, offers two pictures showing how missed installments might be comprised without penalty. One makes use of a later on, bigger re payment plus the other employs an alternative loan. Both circumstances happen in the hypothetical plan’s stated loan remedy duration.
Two Examples Offered
Both examples are derived from the reality that: (1) the k that is 401( plan in question permits plan loans and permits for a remedy duration; and (2) that on January 1, 2018, the participant obtains an agenda loan that will not go beyond the permitted restriction on such loans, just isn’t a mortgage loan, includes a legitimately enforceable contract, and it is repayable in equal installments at the conclusion of every month for the contract, that is amortized over 5 years.
In this situation, the plan’s remedy duration allows a participant make up a missed installment payment by the last time of this calendar quarter following the calendar quarter when the installment had been due.
The amount of the loan will be treated as having been received by the participant as a distribution from the plan as background, the federal tax code’s Section 72(p), which governs plan loans, provides that if a participant receives (directly or indirectly) a loan from a qualified employer retirement plan. Then a deemed distribution of the loan that may be taxable occurs, the IRS memo said if a plan loan satisfies these requirements but payments are not made in accordance with the loan’s terms.
Here you will find the IRS Chief Counsel guidance memo’s two examples
Circumstances 1: Make-Up Installment Payment. The participant makes prompt loan installment re payments from January 31, 2018, through September 30, 2019. The participant misses the March 31, 2019, and April 30, 2019, installments. Then makes payments on May 31, 2019, placed on the missed March 31, 2019, re payment, and June 30, 2019, that will be put on the missed April 30, 2019, repayment. On July 31, 2019, the participant makes a repayment corresponding to three installments—which is applied towards the missed might 31 and June 30 re re payments for the 12 months, along with the needed July 31, 2019, installment payment.
Circumstances 2: Substitution Arrange Loan. The participant makes on-time installments from January 31, 2018, through September 30, 2019. She misses the 31, 2019, November 30, 2019, and December 31, 2019, installment payments october. On January 15, 2020, she refinances the mortgage and replaces it having a loan that is new to your outstanding stability for the original loan, like the three missed payments. Underneath the terms of the replacement loan, it really is become paid back in degree equal payments at the finish of every month through the finish associated with replaced loan’s payment term, December 31, 2022.
No Breach
The IRS memo said that both in situations the individuals’ missed installment payments “do perhaps maybe not break the amount amortization requirement under” code part 
72(p) because both are cured inside the cure period that is applicable. “Accordingly, there is absolutely no distribution that is deemed of loan as a result of missed installments. ”
In addition figured for both circumstances provided, the remedy period allowed in the program will not expand beyond the period established in Section p that is 72(, meaning the remedy duration will not exceed the final time of this calendar quarter following the calendar quarter when the missed installment re payment had been due.
If either of those actions to settle or change the installments is taken following the permitted remedy period ends, nevertheless, the whole outstanding stability for the loan becomes completely taxable being a considered circulation, maybe perhaps not just the missed installment payments alone.
The remedy duration, if permitted, ought to be within the written plan document.
